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JOINT STANDING COMMITTEE ON FOREIGN AFFAIRS, DEFENCE AND TRADE Trade Subcommittee
14/04/2010
Australia's trade and investment relations with Asia, the Pacific and Latin America

CHAIR (Ms Saffin) —I declare open this public hearing into Australia’s trade and investment relations with the nations of Asia, the Pacific and Latin America which is being conducted by the Trade Subcommittee of the Joint Standing Committee on Foreign Affairs, Defence and Trade. This is the 15th public hearing for this inquiry. Today the subcommittee will be taking evidence from the New Zealand High Commission, the Australian Federation of International Forwarders and the Export Finance and Insurance Corporation. During the course of this inquiry the subcommittee has been seeking ways to widen and improve our trade and investment relations with the countries under reference. So far the evidence has indicated that there are many opportunities to achieve those goals, but there are also challenges that must be overcome before we can do so.

The subcommittee is delighted to welcome witnesses this morning and particularly appreciates the willingness of the New Zealand Deputy High Commissioner to return to complete the hearing that was cut short earlier this year. We thank you for coming back to continue. Mr Vitalis, when we had to cut it short we were in the middle of some very interesting evidence that you were presenting for the committee. The subcommittee members anticipate very interesting discussions with the representatives of the Australian Federation of International Forwarders and the Export Finance and Insurance Corporation, which we call EFIC. The important roles these organisations play in our trade and investment relations are very relevant to the subcommittee’s inquiry.

On behalf of the subcommittee I would like to welcome Mr Vitalis. We also have with us Caroline Scarupa, who is an intern with the Embassy of the Republic of Argentina—welcome. Although the subcommittee prefers that all evidence be given in public should you at any stage wish to give any evidence in private, you may ask to do so and the subcommittee will give consideration to your request. Although this committee does not require you to give evidence on oath, you should be aware that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the chambers themselves.

Mr Vitalis, you have already given your opening statement in the previous hearing so I imagine that we will just pick up where we left off. We have a list of questions that we would like to proceed with.

Mr Vitalis —That is good. Thank you.

CHAIR —I will lead off with the first question. During our previous discussions Senator Forshaw asked you about the way we should be considering further progress with CER, particularly in the context of relations with other countries and groups in Asia, that is China, India, Japan, Korea, ANZ FTA, ASEAN+6, APEC, and the East-Asia Forum. Could you add anything to your earlier response, because I think that was the point where we were cut short?

Mr Vitalis —Yes. I think I offered to come back on that point in particular.

CHAIR —Yes.

Mr Vitalis —The interesting thing from our perspective, and for Australia as well, is to think about what is happening in our region. I like to think of it in three ways. It is a set of competitive models, or models for competitive liberalisation, and a set of clusters that are emerging around there. The key question that underpins that is: where are Australia and New Zealand in relation to those clusters, and then the emerging regional architectural structure? You have models of liberalisation, clusters and then actual structures now emerging or that have emerged already.

In terms of the first point around models of liberalisation, what is very interesting about our region is that it has come late to this wave of integration. If you think of the first wave of integration taking place in Europe and the second wave took place in the Americas, particularly around the North American Free Trade Agreement, but not only, this third wave is a relatively new one occurring largely in the early 1990s carrying us right through to now. That is the third wave of regionalisation in the Asia-Pacific region.

I would argue that you are seeing emerging a set of competing models of the way in which countries might want to liberalise and integrate. You have the ASEAN model with the ASEAN countries, as a group, negotiating very consciously what they are calling ASEAN+1 arrangements; in other words, ASEAN plus Japan, ASEAN and Korea, ASEAN and India, ASEAN and Australia and New Zealand; they count us as one. That is one model for liberalisation.

The second model for liberalisation that is emerging in the region is China’s approach to integration in the region. China, too, has an active set of free trade agreement negotiations. It has concluded an FTA with New Zealand, for example, and that is one version of the China model. There are other versions of the China model around as well. The ASEAN China FTA, for example, is another way of thinking about how China is looking at regional integration.

The third model of liberalisation is around what Japan and Korea are doing in the region. I have clustered them together, although they do take slightly different approaches, but in general they tend to have a similar outlook. They have agreements with ASEAN. They are looking to negotiate with other countries in the region, including separately with Australia and New Zealand, for example, so that is another competing method of liberalisation that is emerging.

You then have the United States, which both of us have been very pleased to welcome into the region through Australia already having an FTA with the United States, but the United States does not have any FTAs with any of the major Asian economies in the region. It appears that President Obama has selected, as his vehicle for regional integration, the Trans-Pacific Partnership Agreement, of which of course New Zealand was a founding member, along with Chile, Singapore and Brunei. We are very pleased that Australia is looking to join now, along with the United States and a whole set of other countries that I referred to in my opening comments.

There is a fifth model of liberalisation, which India would argue has its own little claim to be a model for regional integration. It, too, has negotiated an FTA with ASEAN. It is looking to commence a negotiation with Australia. It has launched a negotiation with us, and we have just had the first round of negotiations last week in New Zealand. That is the fifth version of that liberalisation and integration model that is emerging in the region.

I would also argue that Australia and New Zealand have their own model of competitive liberalisation that is occurring here as well. We both have FTAs with Thailand. We both have FTAs with ASEAN. New Zealand has an FTA with China. We are both negotiating FTAs with Korea and, of course, the approach that New Zealand and Australia have tended to take in those negotiations has been with a very clear and firm view about what integration should mean and what comprehensive free trade agreements should look like; in other words, substantially all trade needs to be covered and it needs to be a ‘single undertaking’—in other words it covers as a minimum goods, services and investment—and we have both thought consciously about this in terms of really integrating our economies into the region.

There are these competing models of liberalisation out there and I think the interesting question we should ask ourselves is: who is missing from our region. The obvious partner that is missing, which should trouble us, is Europe. Europe is not engaged in our region in a serious way. It sought to launch an ASEAN-EU agreement. It looks like they have decided to break that into smaller, more digestible chunks, starting off with Singapore and looking, perhaps, to do something with Vietnam.

I say that these are all competing and different versions of liberalisation because they take very different approaches. If you look at what ASEAN and perhaps the Chinese have done, they have tended not to do ‘single undertaking’ free trade agreements. The notable exception for China has been the FTA that it did with New Zealand, which of course was a comprehensive and high quality FTA, but this does stand in stark contrast to the approach that it has been prepared to take with other partners in the region.

You then have the US approach and the Australia-New Zealand approach, which I talked about before. With the United States joining the Trans-Pacific Partnership Agreement, you have the prospect of having a very serious single undertaking, comprehensive, 100 per cent tariff elimination outcome with a key partner in the region, but which also includes a number of very important ASEAN partners, not least Vietnam and Singapore. Then there are interesting signals from other partners in the region that are interested in joining that process. Those are the models of liberalisation that are occurring in the region.

That brings you to the question that Senator Forshaw was alluding to as to how we should be thinking about some of those processes that are emerging that are clusters. I have talked about models and now you have got clusters. Those clusters, I would argue, are your ASEAN+3, which is ASEAN working on integrational processes with China, Japan and Korea. You then have the ASEAN+6 process, which of course is the one which involves our two countries plus India, which brings it to six. You then have a very interesting development, more recently, which is what the ASEAN countries are calling the ASEAN+8 process, which brings very interestingly not only the United States into the region more directly, but also Russia, which I think is another very interesting angle in this conversation.

I think those clusters are very important because they are going to determine, in a sense, the way in which we both need to be thinking about how we plug ourselves into this region. Obviously the ASEAN+6 process and the ASEAN+8 process are the most interesting to us because they involve us. I would argue that those two processes are the most interesting to business as well, not just Australian and New Zealand business, but business in general. It seems to me that you have got this set of arrangements that are emerging that are increasingly complicated for businesses to keep up with. For example, a New Zealand business needs to think about which rules of origin it needs to comply with to trade with Thailand versus what it might want to trade with Malaysia or what it might want to do with Indonesia. There are three separate potential agreements that a New Zealand trader could utilise, quite apart from the WTO arrangements that are already in place.

So a small New Zealand company would need to be thinking about which of those offers the best benefit. That suggests that at some point you are going to need to think about how to bring all of these agreements together, how to make sense of them in a way that actually helps business. Let us remember that for both of our countries more than 90 per cent of our companies are small and medium enterprises. They are the ones who are grappling with these kinds of issues where every change in the tariff line that we are able to negotiate as negotiators, every change in the rules of origin, every change in the arrangement which governs the way in which a service can be delivered in a country matters to the bottom line of these companies. Every single one of those arrangements then becomes very significant indeed. What we have got to be thinking about is what is the best way to maximise that gain.

It is very clear from the modelling that has been done by regional organisations like ERIA, based in Jakarta, but also the ADB, that the biggest gain—and I do not just mean for Australia and New Zealand, I mean for the ASEAN countries and for the Asia-Pacific region in general—is clearly from the biggest possible arrangements. The ASEAN+6 process is worth the most economically not just to Australia and New Zealand but also to all of our ASEAN partners, not to mention India as well.

Clearly, we need to be thinking about ensuring that these processes will move forward, that we participate actively and are engaged in them, so that our partners know that we take them seriously, that we see a long-term engagement process and that we see this as a way of our economy being plugged into theirs.

That brings me to the third point that I wanted to make. The first one was the models. The second one was these clusters that are emerging. The third one is around these regional structures or regional architectures that are starting to emerge. The first one and arguably the most longstanding is APEC where, of course, Australia has a very proud history, having been one of the key founders of that organisation. APEC has been a critically important mechanism to drive this regional integration process here. It has done a lot of work that is of practical interest to business. For example, the recent commitment by member economies to improve what they call the ease of doing business this year and by 2015, to make it easier.

APEC has been very important in terms of building confidence in one another. The way in which we get to meet with our colleagues and our negotiating partners from Asia-Pacific countries—from Indonesia, Malaysia and Thailand—that kind of confidence building process has been very important to the long-term development of regional integration in the region as well. I think it is often a much neglected aspect of APEC, but it has had the benefit of bringing people together. I saw that most clearly in the negotiations that I led with ASEAN countries where I found that my counterparts had invariably come across their Australian and New Zealand counterparts from Customs organisations, ministries of environment, from APEC treasuries and so on. There was a familiarity and an ease of doing business and understanding one another that certainly helped in a practical way in terms of the negotiations.

The other very interesting structure that is now emerging is the East-Asia Summit process. That is a very exciting development in terms of our shared interest in the integration of the region.

The other point that is emerging around there is that you have ASEAN, which is a longstanding regional structure that has its own secretariat based in Jakarta. That is a development that is becoming a very interesting and significant one for both of us. You then have Australia’s own initiative, the APC, which is going to be a very interesting way of thinking about the future over the next 10 to 15 years.

So what does all of this mean for us? I think for both of us, certainly for New Zealand, we need to be thinking about all of these structures. We simply cannot put all of our eggs in one of those baskets. It would be tempting to say, ‘Let’s stick as close as we can simply with the United States because of the TPP, the Trans-Pacific Partnership Agreement’, but I think that there are a lot more things that we need to be doing. Certainly, we need to continue our negotiations with Korea. You obviously need to continue negotiations with China. We both need to work with Japan. We both need to be looking at how we bring other partners into the region from the Americas, which of course is part of the TPP strategy, but the other very interesting initiative that I think we are both working on together is looking to launch a process with the MERCOSUR countries as well, to bring them more closely into the region.

But throughout this, whenever you think about the Asia-Pacific region, it is an inescapable fact that you have got ASEAN at its centre. Those 10 member countries have been very deft about the way in which they have ensured that they are the centre of gravity in the region. They have been very clever in the way that they have negotiated with China, Japan, Korea, Australia and New Zealand, where in each case they have made sure that they are the centre of gravity. They are the magnet around which everyone else is building processes. TPP comes at them from another angle, pulling out some of their members, and clearly others are actively thinking about how they might engage in that.

I think there is a tremendous opportunity here for Australia and New Zealand to be thinking about how our CER economy might look to integrate more closely and more quickly with the ASEAN region. We have the perfect opportunity, in a way that none of the other partners of ASEAN have. That opportunity is provided by the free trade agreement that we negotiated with ASEAN. In that free trade agreement both Australia and New Zealand consciously established a date for the review of that free trade agreement to occur in 2016. That date is very significant because in 2015 ASEAN has a declared intention of creating the ASEAN economic community.

Regardless of what you think about the reality of how far ASEAN could go in terms of developing an economic community, there is one inescapable fact here. This is that ASEAN has already moved very quickly, in relative terms, and certainly compared to where the European Union and the European Community, as it was then, has evolved. It has taken the European Community nearly 50 years to get to the point it is at; ASEAN, within 10 years, has moved to cover ground that it took about 25 years for the European Union to cover. So we have a very exciting development in our region. If we are not active in thinking about it—and I would say thinking about it now—we risk missing an opportunity because when these guys set themselves up and they work together, the 10 of them, and they set up this ASEAN economic community, where are Australia and New Zealand? Where is it that we want to be in 2015 and 2016? Let us not forget that by 2016, in any case, 90 per cent of two-way trade between us is going to be tariff free anyway. We cannot think anymore about defensive processes because we have already agreed to remove those tariffs from those countries by 2015 and 2016.

Both of us have every incentive to be engaging closely with ASEAN, to be thinking now about how we, as longstanding partners of ASEAN, do this. Australia and New Zealand have got longstanding relationships with ASEAN in a way that I would argue that we do not have with almost any other country in the region. Your relationship with Indonesia is a tremendous advantage to us both. Our relationship with Indonesia and the other partners in ASEAN gives us both the building block on which to move forward. I would argue that we need to think about what the ASEAN economic community means for us now so that we are well placed in 2015 and 2016 to really engage with them. That is a very long-winded way of answering your question.

CHAIR —I can still hear some outside. Thank you. That is very helpful.

Mr MURPHY —The communique from the last ministerial forum referred to a review of the rules of origin for CER and said it was almost complete. Has it been completed and, if so, what changes are proposed?

Mr Vitalis —The ambition for both of us in CER, including the rules of origin, has always been to have the highest quality and the best and most facilitating rules of origin between our two countries. There have been a handful of anomalies that are historical ones that we have looked to rectify. That review has been underway and we hope that over the next year to two years we will again be able to announce the conclusion of that process such that we will indeed have the most trade facilitating rules of origin in place between us.

The idea of the review was simply to catch us up to where both of us had got to in our free trade agreement. What we were concerned about was to avoid a situation where either one of us, as the closest partners, might be in a situation where in some other free trade agreement—us with China or us with Malaysia, you with the United States or you in your own negotiations, for example, with ASEAN—if your rules of origin have evolved and ours have also evolved, then we wanted to make sure that we gave the best treatment that was available to both of our companies operating across the Tasman.

Mr MURPHY —The communique also referred to work on a CER investment protocol expected to be completed by the end of 2009. Has that been completed?

Mr Vitalis —It is very close to completion. This has been a longstanding ambition of both governments. Last year our two prime ministers announced that they had agreed a new threshold for overseas investment screening where we will be just short of $1 billion, which would mean that any New Zealand investment under that figure that came into Australia would not be screened, and we had agreed in exchange a proportionate response of roughly somewhere just below $500 million for Australia.

As with all of these international treaties there are a whole series of discussions that we need to continue, but I think both sides are confident that this is now very close to conclusion.

Mr MURPHY —What steps have been taken to streamline trans-Tasman travel and what barriers at the border are likely to be removed?

Mr Vitalis —The idea with trans-Tasman travel has always been to get as close as possible to domestic travel between us. Perhaps the most exciting initiative that the prime ministers progressed at their last meeting is, of course, the Smart Gate idea. In Auckland airport, for example, and here in Sydney, it will be possible for people to have pre-cleared a whole set of the processes that you would normally go through, therefore significantly cut the time in which it would take for you to get through those processes. We are still separate countries so there are things like quarantine and Customs checks that still need to be undertaken, but the idea is to make it as seamless as possible between us.

Mr MURPHY —Thank you.

Mr COULTON —Mr Vitalis, one of the significant trading areas that we have with cross-Tasman ownership is in the food industry, particularly in dairy. This is a little hypothetical, but in the process of our countries evolving towards an emissions trading scheme or not, if each country does not treat food in the same way, if there is an exemption for food manufacture in one and not the other, how would that imbalance be handled in a free trade arrangement? With the geographical co-location it could be easy for one country or the other to put manufacturing in one country and raw milk in the other and so on. How do you see fine-tuning a free trade agreement, taking into account that we might have different financial protocols in place in our countries?

Mr Vitalis —That is an interesting question and it is a real question, because New Zealand already has in place an emissions trading scheme and there is no exemption for agriculture from that. That is a distinction from the situation here. Regardless of whether or not you have an emissions trading scheme, your emission profiles are different. In the case of New Zealand, more than 51 per cent of our emissions actually come from methane and from the agricultural sector. In Australia the comparable amount is less than 25 per cent, so there is a quantum difference between us, and of course you have a mining industry and a whole set of other emitters that we do not have, so there are some real differences. There is simply no way that New Zealand could be taken seriously if we were to exempt our agricultural sector from any commitments, simply because of that profile, so there are some important distinctions between us in that sense.

The point you make about the way that drives business decision-making and the way in which companies would want to be thinking about that is, of course, a very real and a very live issue in New Zealand. Indeed, I know it is very live for your agricultural sector as well in terms of what it is that New Zealand does, how Australia should be thinking about it and, certainly from our perspective, what you do has implications for the way in which we need to think about things like transition periods for the sector and compensation packages that might need to be developed. In the end, the important point is that companies do not make investment decisions simply or only based on something like the emissions trading scheme. There will be a whole set of factors that come into that. If you are thinking about dairy, one of the things that you are going to think about is where production best takes place and where your investment has the greatest return. Those kinds of questions are going to be bound up in the way you need to think about the emissions trading scheme.

The question you have therefore asked is a very live one. It is one that both sides are thinking about. Your Department of Agriculture and DCC are actively thinking about the implications for them and we are certainly very active in following the debate here, and also to think about how that drives the evolution of our emissions trading scheme in New Zealand.

One of the things that the two prime ministers have spoken about is the extent to which our two emissions trading schemes—should there be one in Australia in the near future—should be aligned, brought together, amalgamated or whatever. No definitive conclusion has been taken on that, but the attraction of trying to align them in some way certainly has some appeal.

Mr COULTON —It is a little hypothetical at this particular juncture, but it is something that I have been thinking about. Thank you.

CHAIR —It was too good an opportunity to let go by.

Mr COULTON —In this inquiry trade facilitation has emerged as a very significant issue. Can you tell us what areas in trans-Tasman trade are being focused on at present?

Mr Vitalis —One of the interesting features of the CER agreement is that it is such a longstanding one. The World Trade Organisation has called it the most comprehensive and high quality agreement bar none in the world. In terms of trade facilitation between us, both of us have trade promotion agencies that very actively look to establish that. The interesting thing has been, more on the New Zealand side than perhaps on your side, the extent to which New Zealand companies grapple with your sub-federal systems. There is often an assumption by companies in New Zealand that if they are trading with Victoria then they will have no problem trading with Queensland. That is not the case, of course. There are a number of additional certification procedures and processes that people need to go through, or when they are making investment decisions, that they need to think about. That has been one of the interesting things. From our perspective the seamless economy, the seamless process that your prime minister has talked about here, has been of great interest to us in terms of what that actually means at the ground level for New Zealand companies looking to do business across state lines here.

The very interesting thing about the way in which we both look at trade facilitation is to take some of the lessons that we learned from CER out into the wider region. In particular, last year our two prime ministers announced that our trade promotion agencies would work together to promote the ASEAN-Australia and New Zealand Free Trade Agreement into the region, so collectively Austrade and Trade New Zealand Enterprise are looking to leverage the CER economies more closely into the ASEAN region. I think that is a very interesting extension of the CER trade facilitation work that has already taken place, looking now to leverage those benefits and the lessons that we learnt together over the last 20 years, and looking to put that out into the ASEAN countries and improve our trading prospects with those partners as well. For me, that is the future that CER needs to be thinking about. Together we have an active program around the single economic market to get our two economies even more closely integrated. The next interesting phase is going to be how we two work together to get ourselves into those other regions out there.

Mr COULTON —Are you saying that Australia and New Zealand should be a trading entity into those other areas?

Mr Vitalis —I am not quite saying that we would become your seventh state because there are very clear New Zealand views on that. What I am saying is that it makes sense for us, where possible, to work together. I think Australia and New Zealand working together is better than Australia working on its own or New Zealand working on its own.

Mr COULTON —‘Entity’ may have been the wrong word.

Mr Vitalis —I understood what you meant.

CHAIR —In collaboration.

Mr COULTON —Yes, collaboration.

Mr Vitalis —I think that is the future for us. It is a pretty lonely world out there. I was struck, when you go around Jakarta, as to the extent to which Australian and New Zealand companies already work together. In Indonesia, in the region, they have all these competitors out there—and it is a world filled with sharks from the United States, European companies and companies from South America that are also operating actively and very vigorously there—so it just seems to me to make sense for us to collaborate as much as we possibly can. There are obviously going to be areas where we simply cannot collaborate, where the commercial competition between us is too fierce for whatever reason, but those are more likely to be the exception than the rule. I would have thought that, in most cases, we would be able to work together.

The things that the two trade promotion agencies are working on, designed around trade facilitation, are joint seminars in the region where Australian and New Zealand companies would be invited to come along. Some of them would give case studies of what they have learnt. They would be trying to bring attention to our own companies to really engage with the region, working together and sharing our pool of knowledge and experience there.

CHAIR —That is interesting. Thank you. Can you tell me what are the main advantages you expect to see in PACER Plus when you compare it with SPARTECA?

Mr Vitalis —I am guessing your question is really about the advantages for Pacific island countries.

CHAIR —Yes, it is. What are the advantages as you see them?

Mr Vitalis —I think that is a very important question and one that both Australia and New Zealand have to think about. The reality, on the ground, is that Pacific island countries already have duty free and quota free access to Australia and New Zealand. That is already there. It becomes a legitimate question, from the perspective of the Pacific island countries, to ask ‘What’s the new thing that I’m going to get out of Australia and New Zealand if I’m going to participate in this negotiation?’ because it will be a negotiation. Under the terms of the WTO agreements, if you enter into free trade agreement then both sides need to commit to liberalise substantially all trade. Unlike SPARTECA, this will be a process whereby the Pacific island countries will need to do something as well. That raises a very legitimate question on their part: ‘If I’m going to give then what do I get?’

CHAIR —What do I get when I am giving up tariffs or whatever?

Mr Vitalis —Exactly. I think that is a very important question. There is one thing that I think we forget about that is very important to Pacific island countries, and that is the rules of origin. Many Pacific island countries have complained that it has all been fine to have duty free and quota free access to the New Zealand and Australian markets, however the rules of origin are so out of date that they simply cannot take advantage of it, so their production processes and facilities are simply unable to take advantage of this duty free access that they have to the New Zealand market or to the Australian market because the rules of origin are so out of date.

CHAIR —Because it is such a low percentage that—

Mr Vitalis —That is right. If you compare, for example, the rules of origin that we have agreed with ASEAN countries, which includes some least developed countries—Laos, which is not even in the WTO, Cambodia and Burma—those countries have better rules of origin applying to them entering the Australian and the New Zealand market than the Pacific island countries currently do. That is obviously something that Pacific island countries could legitimately expect us to fix for them.

CHAIR —In what way?

Mr Vitalis —We would need to make more facilitating rules of origin for them. We would update the way in which SPARTECA handled rules of origin. In effect, it has not. What we would look to do is make those more liberal and that would allow Pacific island countries to actually get the benefit that we have given them for such a long time that they have not been able to take advantage of. Rules of origin is a really important element of that negotiation.

On the tariff side we do not have anything new to give them because they already have duty free access. In services and investment the Pacific island countries would benefit from having a more stable and assured regime, but the hard reality there that we both need to accept is that in terms of Pacific island investment in Australia and New Zealand and indeed, in services trade to us, it is all pretty small and you would be hard put to find actual barriers that are in place now that are preventing or chilling Pacific island investment to or services trade with our two countries. It is hard to identify what they would get out of that part of the negotiation.

What ministers have been talking about that I think is of the greatest interest is the capacity building process, in other words development assistance. It is not going to be just development assistance in its traditional form. This is going to be development assistance that is designed to build capacity to take advantage of the trade agreement. To give you a couple of practical examples, in the case of New Zealand some time ago we established a particular section in the Ministry of Agriculture that would process requests from Pacific island countries on quarantine questions as a priority. That was one way to try to assist them and to help them directly. You could see a process whereby you would have a New Zealand quarantine or MAF official working directly with the Pacific island counterparts on tropical fruit access to the New Zealand market to try to help them establish the kind of mechanisms they need. Remember that these are going to be very small, not even medium sized, enterprises that are going to do this.

The other interesting question is going to be building capacity around servicing the local economy as well. You could see, for example, scope for local tropical fruit producers to increase the quality of production domestically to provide for the hotel services trade. I think you will be as surprised as I was to learn that many hotels in the region simply do not have a secure supply of products, so they rely on getting products from outside of the direct region. You can see that there is a little niche capacity there to build up. Around tourism services, for example, we could look to provide targeted specific assistance to help them maximise the benefit of tour groups that come through. I could see a way in which our two countries, our trade promotion agencies, are thinking about how they might work together to bring, for example for the Rugby World Cup, when you have visitors coming to New Zealand as to how is the Australian trade promotion authority looking to talk to us about how they might bring them over to Australia as well. We have had a long-running tradition of trying to get people that come to visit Australia to nip across the ditch to come and see us in New Zealand. We could envisage a way of extending that by adding one or other of the Pacific islands on to that process as well.

I think there is a real, keen interest on the part of Pacific island countries to look at what that capacity building is going to look like, but that kind of dialogue cannot be just a one-way conversation. It has got to be one where they also are clear about the kind of things that they need and where they would most benefit, but we would be very clear that this kind of capacity building is designed to help them leverage the benefits of economic integration and this kind of free trade agreement.

The third area that I know is a sensitive one is, of course, regional mobility, labour mobility. New Zealand has a longstanding set of arrangements with a number of Pacific island countries. I know you have something similar, perhaps of a slightly different type. It will be those kinds of things that Pacific island countries will be looking to because of the value of remittances, because of the way in which you can upskill your labour force, how you bring them back and how that capacity building can help. Those would be my three things that I would identify: the rules of origin in a really practical way, the trade and development angle with this building capacity question, and then of course regional mobility has to be at the heart of this negotiation from the perspective of the Pacific island countries.

Mr COULTON —On the rules of origin, is that so that a Pacific island can sell produce to New Zealand or Australia? It is manufactured or whatever and then it is sold as a product of either Australia or New Zealand. Is that what you are talking about?

Mr Vitalis —Yes. Essentially, a rule of origin would apply whereby you would produce a certain amount of a product in a Pacific island country and you would qualify for the duty free access. At the moment you could have a situation where a product comes from outside the region, say China or Japan, a certain amount of value is added in the Pacific, but it is unable to qualify for the current rules of origin for the duty free access, so it has to go under the WTO rate. For example, in textile, clothing and footwear, in the case of New Zealand—and I know you are in a very similar situation—you are talking about tariffs in excess of 10 per cent. Even if they can add a little bit of value in the Pacific they are not able to benefit from the lower duty. The idea of the rules of origin would be to try to facilitate that so that you get that kind of access. We can ask ourselves a question about whether or not textile, clothing and footwear is really where the comparative advantage of Pacific island countries lies or whether it is somewhere else. Regardless of what we think, it is the rules of origin that determine whether a product qualifies for that lower duty or whether it has to come in under the WTO standard rate that applies for China, India and any other country that comes through.

Mr COULTON —Thank you.

CHAIR —I have a question to do with the AANZ FTA. Do you expect substantial changes to the present patterns because of the agreement?

Mr Vitalis —Let me put it from the perspective of New Zealand. ASEAN is our second largest trading partner as a block. Australia is our most important trading partner. I do not expect that to change. Where I do expect something of a change is perhaps a little bit of a move to distribute some of that trade across a broader set of the ASEAN countries. At the moment, for both of us, our focus has been particularly around Indonesia, Malaysia, Thailand and Singapore. The interesting thing is going to be the extent to which this ASEAN-Australia and New Zealand FTA helps us get into new markets in a bigger way. We already have for instance a fast growing trade with Vietnam.

CHAIR —I was going to say which markets?

Mr Vitalis —I would expect Vietnam to be at the core of that. I would expect a modest, but growing, trade with countries like Cambodia and Laos and I would expect the trade with Malaysia to continue to expand fairly quickly too, especially as that economy grows.

With Indonesia there are some very particular benefits to the agreement. In terms of shifting the pattern of trade, I am not sure about that, for the simple reason that from New Zealand’s perspective—which is a little bit different to Australia—more than half the products that we ship to Indonesia are agricultural products. They are beef and dairy. There is a limit to the amount we could produce so that even if tomorrow we got duty free access to Indonesia, we would not be flooding that market with dairy products or with beef because there are a whole set of other markets that we need to service and we would not have the kind of supply to really put into that market anyway, so I would not expect that to happen.

I remember with the China negotiations there was a concern on the part of the Chinese that this would shift the pattern of trade forever and that if they removed the 20 per cent tariff on skim milk powder that they would be flooded with New Zealand product. I think the point we made to them was that, even if you geared up every single farm in New Zealand just to produce for China you would be producing less than 20 to 30 per cent of all of China’s demand anyway. In the meantime we would not be servicing anywhere else in the world where we have some very high value markets to protect, not least against Australian competition.

CHAIR —Particularly in that area. One question that we had down was regarding this particular free trade agreement and whether there would be new scope with Australia and New Zealand for cooperation, but I feel you have somewhat answered that in previous questions when we were dealing with CER and so on. I think you have covered that field in a general sense.

Does New Zealand have bilateral treaties with any of the members of ASEAN or the prospective TPP members? I am sure you do, but it would be good to just talk about that and discuss who they are.

Mr Vitalis —Yes, we do. There was one additional comment that I wanted to add on the shifting pattern of trade, and that was to mention where I would expect there to be an increase in trade is around the services and investment flows because, through the ASEAN-Australia and New Zealand FTA, there is now an investment chapter which provides real security of investment for Australian and New Zealand investors. That is better than anything that New Zealand had in place before the agreement was signed, so there is some real certainty now for a New Zealand investor putting an investment into those countries. I think that is important in a facilitating way and I expect that part of the trade to change. I also expect services trade to change. For example, for New Zealand education services, environmental and engineering services are real priorities. Some of the benefits that we got out of the ASEAN FTA and also out of the Malaysia FTA would give our two countries some competitive advantages compared to other services suppliers. Again, I would expect a modest, but important, shift into that part of the trade.

In terms of your additional question—

CHAIR —It was about the bilateral treaties that New Zealand has with ASEAN or prospective TPP members.

Mr Vitalis —We have existing free trade agreements with Thailand and Singapore. We have a bilateral with Singapore. We also have the P4 Agreement, which is now evolving into the Trans-Pacific Partnership Agreement. In terms of ASEAN we have Thailand, Singapore and Brunei, which is part of the P4 Agreement. We have the Malaysia FTA, so another bilateral treaty. Unlike Australia, we do not have any bilateral investment treaties with any of those countries. That was my point in my previous answer about the value of the investment chapter of the FTA, which now gives some certainty by providing a framework for investment flows between our economies and theirs.

In terms of the TPP and the actual members that are there now, obviously we have Singapore, Brunei, Chile and New Zealand. We already have an international treaty between us. We, of course, do not have one with the United States. We do have one with Australia. We do not have one with Peru. We do have one with Vietnam, as a consequence of the ASEAN-Australia and New Zealand FTA. Yes, there is a set of bilateral treaties around, but obviously the ASEAN-Australia and New Zealand FTA is a key one for us, as is the P4 Agreement, in terms of the quality of the outcome.

CHAIR —We still have a few questions. If you do not mind, can we send them to you in writing? We have not got through all the questions as yet, but I am conscious that we have to wind up soon. There are just a few. We got through this without talking about apples, didn’t we?

Mr Vitalis —I am not sure that I would have any comment on apples.

CHAIR —Neither do I. I have another six or seven questions, if you do not mind, but I would like to finish up on one. What do you see as the relative advantages of multilateral—the submission uses ‘plurilateral’—FTAs?

Mr Vitalis —We have a strong preference for plurilateral and multilateral processes. It is clear that the more partners you have the better that is for trading relationships. The bilateral you can think of as a kind of necessary evil. You then have the plurilateral, but the best of all is a multilateral agreement. I guess no New Zealand negotiator’s comments on any trading relationship would be complete without a comment on the WTO, because that is the most important negotiation, and I would say that was the same for Australia as well. That is the most important trade negotiation that we have in front of us. It is the only way we are going to deal with the largest possible group of countries and it is the only way that we can deal with things like agricultural subsidies. From the New Zealand perspective bilaterals are great. Certainly, as I said in my opening remarks, the addition of what we call a Korea to our trade with China, in other words another $1 billion worth of trade following on from the FTA we concluded with China, is not to be sneezed at, but there is no question that plurilateral processes like the one with ASEAN are really significant in terms of getting us into that regional integration space. They would be first amongst equals, but above all the WTO process is the most important.

CHAIR —Thank you for your attendance here today and for appearing twice. It has been wonderful for us to have the benefit of your vast experience in this area. The secretariat will send you a copy of the transcript of your evidence, on which you can make any necessary corrections to errors of transcription. Thank you. I hope you enjoy your visit home.

Mr Vitalis —Thank you.

CHAIR —I have a copy of the minutes of meeting No. 29 on 17 March. Mr Murphy, would you like to move the adoption of those?

Mr MURPHY —So moved.

—I declare that motion carried. On the second formality, Mr Coulton, would you move that we receive the responses from DFAT to our supplementary questions?

Mr COULTON —So moved.

CHAIR —I declare that motion carried.

Proceedings suspended from 11.26 am to 11.36