Prime Minister of New Zealand John Key joins Former Director of the Office of Management and Budget Peter R. Orszag to discuss the importance of the Trans-Pacific Partnership agreement and its effects on regional economies in the Asia-Pacific. Key analyzes the factors that drive New Zealand’s economy, the importance for the United States of ratifying TPP, and options beyond the TPP to foster trade within the region.
ORSZAG: Good afternoon. My name is Peter Orszag, and I’d like to welcome you to the Council on Foreign Relations. We’re delighted to have Prime Minister John Key of New Zealand with us here this afternoon who will discuss the Trans-Pacific Partnership, including U.S. leadership, and the Asia-Pacific region as a whole.
Mr. Key has served as prime minister of New Zealand for almost six years now, since November 2008, and has been the leader of the National Party there since 2006.
Before entering government more than a decade ago, he had a very successful career, dare I say it, as an investment banker before entering government.
And he leads a country that has many admirable economic qualities, ranking second in the World Bank’s global doing business list. The country has a growth rate of about 3 percent, an unemployment rate of about 2 percent and a debt-to-GDP ratio of under 30 percent, all of which are quite impressive statistics.
But perhaps most importantly, it’s also the home of the All Blacks, the national rugby team that recently won yet another world championship. Indeed, the All Blacks has become such a dominant force in the world of international rugby that I’m wondering, Mr. Prime Minister, if in your speech you might provide some practical suggestions to other countries that are hoping to come even close to your success.
Ladies and gentlemen, please welcome Prime Minister Key of New Zealand. (Applause.)
KEY: Peter, thanks very much. I’ll leave the rugby tips to Steve Hansen, the All Blacks coach. But it’s great to be here. I want to thank the Council for the opportunity to say a few words.
We’re here for a number of reasons, actually, this week—obviously, U.N. leaders’ week, so an opportunity to engage with the leaders. But for the last now nearly two years, New Zealand has been on the Security Council, and this month we’re president of the Security Council. So on Wednesday we’ll be hosting a meeting of the Security Council solely focused on Syria and the issues in Syria. And I think everyone in this room can agree there is the largest humanitarian crisis we’ve seen in a decade—millions and millions of displaced people, hundreds of thousands of lives claimed, and I think a real lack of leadership, actually, from the Security Council and ultimately from the United Nations and an inability to solve the issues in Syria, and now the real need for us all to see it happen. While, of course, we acknowledge and welcome the cease-fire that we’ve seen announced by the Russians and the Americans, the real question is, can it hold, given the events of the weekend? And ultimately, can we build on that to see a sustainable path forward for Syria? So that’s really the preface of sort of being here this week, amongst other things.
Let me just give you a small snapshot of the New Zealand economy, and then we’ll just move into TPP. So New Zealand is—sees itself very much as part of Asia these days. Our largest trading market is still probably Australia on a combined basis. So New Zealand is a country of 4.7 million people. Across the Tasman in Australia is about 21 million, so a combined population of around about 26 million people.
But our largest market for exports goods is China. So China has grown dramatically. We are the only country in the developed world that has a free-trade agreement with all parts of one China. So in 2008 we negotiated the FTA with Beijing, and it’s now been expanded out to include, obviously, Hong Kong and Taiwan. So China exports have gone through the roof, really. I mean, I think two-way trade was around about 8 billion (dollars) when I first became prime minister, and it’s 20 billion (dollars) now. We have a goal of getting to 30 billion (dollars) by 2020, and we’re on track to achieve that.
So if you look at our numbers, broadly growth rate actually is just this week—last week came out at 3.6 percent. There’s a number of things driving the New Zealand economy. So one, like the rest of the world, is low interest rates. So all of itself low interest rates don’t necessarily drive economic growth. You’ve had low interest rates in Japan for a very long period of time and not a lot of growth. But when you have low interest rates coupled with high levels of business and consumer confidence, then you have a very different deal. And that’s what we’ve got in New Zealand. And so it’s really starting to drive the economy.
Second thing that’s been driving the economy is net migration has been positive. So we—a bit like sort of Canada as to the United States, we’ve typically lost people to Australia across a range of different income cohorts, but a lot of, you know, well-qualified people we’ve lost to Australia. So when I was leader of the opposition back in 2007-2008, we used to lose about 35,000 people, net, a year to Australia. For the last couple of years, we’ve had more people coming to live in New Zealand from Australia than New Zealanders going to live in Australia. So net migration is running at just under plus 70,000, so it’s plus 69,000. So there’s no question it’s stimulatory to the—to the economy.
Third thing that’s been driving things a bit has been the Christchurch rebuild, so—post the earthquake that took place. Again, in broad terms, the 2011 earthquake, about 40 billion—45 billion dollars’ worth of expenditure, $17 billion coming from the government and the rest from reinsurance.
We have very strong individual sectors. Tourism is a big part of the New Zealand economy. We had 3.3 million tourists come to New Zealand last year. To put a bit of perspective on it, it took 13 years to go from 2 (million) to 3 million tourists. And we think it’ll take under four years to go from 3 (million) to 4 (million). So our largest market, again, is Australia. Second-largest market is China. We had 1.35 million Aussies last year and 400,000 Chinese. And we think by next year the numbers will be broadly 1 ½ million Australians and half a million Chinese, and a half million Chinese will spend more than the 1 ½ million Aussies. So, you know, lot of expenditure going on. So we’re pretty happy about that, you know. There are—there are certainly doing well on that front.
And our numbers across the—you know, across the board are—you know, are very strong. So debt-to-GDP is about 25.8 percent. We expect that to be on its way down. The government’s goal is to have net debt-to-GDP by—20 percent by 2020, and we’re on track to achieve that. The government is in surplus, has been last year and is this year, and surpluses are rising. Unemployment’s 5.1 percent technically—I mean, it’s pretty low levels of unemployment, but participation rates are very high. So we have the second-highest employment rate in the world and the 11th-lowest unemployment rate in the world. Generally, wages have been rising quite rapidly. So wages are rising much faster than inflation. So in the eight years I’ve been prime minister, wage growth’s been 25 percent and net’s 13 percent.
So, overall, we’ve got a very strong economy. And the basis of it has always been food production, agriculture, sort of viticulture, horticulture. So to produce 3.6 percent when dairy prices are so weak is kind of interesting. But we see the rebound in dairy prices happening. So already we can see pent up demand from our biggest market, which is China. So a substantial amount of—we are 80 of all exports for baby formula into China. So large demand. And the market’s really starting to come back. So we see, again, you know, again, a lot of positives about the New Zealand economy and, you know, potentially very—you know, very long-term levels of growth.
I suppose, just turning to trade for a minute, I mean, and TPP, which really is the basis of making a few remarks this afternoon. So it traces all the way back. TPP came from initially an FTA which was really between New Zealand and Singapore. So it was a two-party transaction, broadened out over time. And started, obviously, with the eight sort of countries that were involved, and expanded out ultimately to the 12 that are involved. We have been, you know, right at the forefront of driving TPP.
I think it’s fair to say, you know, in the world of TPP, a lot of times New Zealand has sort of been the bad cop and other countries have been the good cop. Why do I say that? The answer is because New Zealand is well-known for being a free-trading nation that signs high-level comprehensive deals. And so, you know, if you’re a believer in high-quality FTAs, then that’s the position that New Zealand’s been advocating. Our first FTA really started in about 1987 with Australia. It’s called CER, Closer Economic Relations. It was the—probably the most comprehensive FTA New Zealand’s ever done.
And the proof of really, you know, the success of those free trade agreements and what happened with New Zealand has been testimony to what happened to the New Zealand economy. So just to give you an example, one of the parts of that 3.6 percent growth rate is the fact that our manufacturing sector has expanded 42 months in a row. In fact, we had the highest level of exports in 18 years in our most recent numbers. So it gives you a sense of how much the economy has changed from being what was a very closed sort of fortressed New Zealand prior to 1984. We needed an import license, for instance, to bring to margarine. Our cars were made in New Zealand. Wine was made in New Zealand. It was terrible. As opposed today, when wine is made in New Zealand and exported to the world, and it’s fantastic.
So what happened was the world opened up—we opened up to the world. Effectively got rid of all tariffs and all subsidies. It was come one and sort of come all in terms of sending products into New Zealand. And that had the obvious economic implications, which was to force New Zealand companies to specialize in the areas where they had a competitive advantage, ensure that New Zealand could compete on the world stage, drive innovation and creativity in the New Zealand economy, and make New Zealand match-fit to take on and succeed companies that they see all around the world.
Today we’re in the process of negotiating a range of other FTAs. We’ve completed quite a few in the time that I’ve been prime minister: so, the ASEAN-Australia-New Zealand FTA, the Malaysian FTA—(inaudible)—Hong Kong and Taiwan. We’re getting pretty close to an FTA with the European Union, which we’re hoping to complete next year. We are very close to completing an FTA with the Gulf States, including Saudi Arabia, of course. We’re working on a number of other FTAs that we think will be important for New Zealand.
So if we got to TPP for a moment, I think what you’d say is that TPP was always going to be a challenging and difficult FTA, primarily because it included 12 moving parts, quite diverse countries, and diverse stages of development. Not the least it included Japan, who didn’t have a long record of doing comprehensive FTAs. And it included certain provisions around the environment and labor laws. The initial rationale around TPP wasn’t just the economic benefits—although we, like all the countries involved, modeled what the economic benefits of TPP were.
To put some perspective on that, just to give you a New Zealand perspective, when we modeled the China FTA, we saw that economic benefits were roughly about 170 million in tariff reductions, and about a billion dollars of behind-the-border benefits. With TPP, the modeling showed about 275 million of tariff reductions, and $3 billion worth of economic benefits. And China outperformed the best economic modeling by 11 times. So they were out by a factor of 11 for the China FTA. And we’re pretty convinced that TPP will be more successful for New Zealand than what are currently the most optimistic projections.
So when you look at what took place around the rationale, obviously for the United States there were a couple of drivers. And one of those was lifting the economic opportunities, just like every other country. Greater access to, you know, growing, middle-income consumer base. And in the case of Japan, a highly developed economy with, you know, very wealthy consumers. But the second and probably most major point, and one of the core, driving reasons for President Obama, was the Asian pivot, so the need for the United States to be part of the region and show leadership in the region. And I think the third part of it was, while TPP incudes 12 countries there was, and remains, I think, an expectation that other countries will join. And there are plenty of countries, from China to Korea, expressing interest in joining TPP.
And so our view is that TPP fails to get ratified during the lame duck period, it will be a mess of lost opportunity for the United States, both for the consumers and business, but also for the geopolitics of the region because, in the end, if that vacuum isn’t filled by the United States. It will be filled by somebody else. It has to be. And anyway, if the United States ceases to want to promote free trade and somehow, you know, close off, if you like, the U.S. as an open economy to the rest of the world, while initially and superficially that might look attractive what we know is that over time forces your companies to be less competitive, less productive, more fat and more happy in the short term and long term less successful. So the clear evidence from New Zealand is competition makes you succeed at a higher rate.
And that’s why athletes want to compete on the world stage. That’s why, you know, the greatest films want to be shown on the world stage. That’s why artists want to show their works on the world stage because they—you know, ultimately competition drives success and better performance. And it’s the same for an economy. And so we think that the U.S. is in a really pivotal point because if it’s not passed in the lame duck period than the question is, will it ever be passed? Because when people say the deal can be modified and the parties can come back to the table, that relies on those 12 countries having the will to do that, and that’s not just a U.S. position. So there are a number of countries included in TPP who have had either change of leadership, who would find different conditions much more challenging, who would be far more—(inaudible).
So there’s a deal there. The deal’s ready to be signed. And in our view, it’s massively in the United States’ interests to sign that deal. So the challenge, of course, is can they get those through—this through in the lame duck period? I think there’s a range of different views. Some people would say, you know, it’s not easy. It would require a lot of heavy lifting. It would certainly require Republicans to vote at a time where that might not be easy for them. On the other side of the coin, what we have seen and what we continue to see is a very strong case being made for TPP, not just from commerce here in the U.S. and from the Treasury, but from the Pentagon, for the reasons that we made earlier, that is that, you know, the geopolitics of it argues very strongly for U.S. leadership in the region.
So that’s really where we’re at. Those are probably good opening comments. And you can feel free to ask me any topic you like. And I’ll give you an answer. Thanks very much. (Applause.)
ORSZAG: Terrific. And thank you again for those comments. Why don’t we start off on trade, and we’ll turn to some other topics before opening up to members in a bit? It’s interesting, Elizabeth Warren, who’s one of the staunchest opponents of the TPP, has been the leading proponent of deepening the Boston port. And the reason the Boston port is being deepened is to accommodate the larger ships that can now go through the expanded Panama Canal. So trade with Asia that’s facilitated by a larger canal and deeper ports, good. Trade with Asia that’s facilitated by TPP, bad.
But in that might lie some prospect for a way forward beyond trade agreements. Obviously there are lots of things that affect trade. So I’m just wondering, before we turn to the details of TPP itself, do you see other ways of fostering trade and engagement beyond the TPP? In other words, even if it does fail, how could the U.S. promote trade with the region and engage constructively?
KEY: Yeah, well, I mean, as I always say to our companies, you know, a free-trade agreement’s an entrée into somebody else’s market. It doesn’t guarantee success. I mean, ultimately, if you want to really foster, you know, flowing two-way trade, then you need company-to-company relationships. You need cross-investment. You certainly need investment in each other’s market. You need the opportunity for people to move, and so you need the flow of people. You need promotion of each other’s markets.
So a lot of what we deal with—if you take China, for instance, the China FTA is interesting because it gives us access for finished products into the Chinese market. But a lot of what we’ve been using our time now to do is to develop with Chinese partners products that are specific for their market of specific interests. We’ve been doing a lot of work on the behind-the-border scenes on how to speed up the flow of goods and services and ensure that they can never get each other’s access points.
And if you look at APEC, a lot of what the commercial part of APEC industry, the APEC members, it’s very much those behind-the-border things. So it’s quite possible to do that with our FTA. But the FTA is the flagship sort of, I think, standard bearer for saying we are open for business; we want to do things together. Here’s the reason to do it. And while the tariffs might be relatively modest that might be in place, they still have an impact on people’s appetite and interest to trade. So I think you can do it without an FTA. It’s just a lot more challenging.
ORSZAG: So one of the things about the TPP is the economic analysis, which may be—
ORSZAG: —too pessimistic—
ORSZAG: —but suggests, you know, something like a 2 percent GDP lift for New Zealand, but only like a .15 to maybe half a point for the U.S., so a much smaller effect, which is not surprising, given that our tradable—
ORSZAG: —sector is smaller. But in that context, and especially because the debate over trade has proven to be contentious, because, I mean, let’s just admit it, there are winners and losers. Some people are made better off. Other people are made worse off. And the people who are made worse off—
KEY: Don’t like it.
ORSZAG: —you know, really don’t like it. How have you been able to—I mean, part of the explanation for kind of an easier path is that the aggregate benefits are larger. But there’s something, I think, beyond that. How are you able to make the case domestically in your country in a way that, at least to date, seems more successful than we’ve been able to do here? What is it about the trade debate there that is different?
KEY: OK. So the first thing you’d say is that if you go all the way back to 1987, when the then-Labour government undertook the reforms, they essentially eliminated all of the controls around goods coming into New Zealand. So one of the questions is what do we give up when we sign an FTA? I mean, a Chinese company can already sell a product into New Zealand. An American company can already sell a product into New Zealand. So you’re not giving anything up. That’s the first point. You’re not protecting a possession that you’ve got. For the most part that’s largely correct. So I think that’s one thing.
Second thing I’d say is that there’s no doubt that TPP has been more controversial than any other FTA we’ve done. So, yeah, there was some discussion about China, and some of the unions didn’t really like the China FTA, but it went through. Most of the others have gone through, you know, largely unnoticed. The Korean FTA didn’t gain a lot of concern.
But one of the main reasons is we’ve tried to, you know, sell a story, which is New Zealand is the last bus stop on the planet. You know, we’re a little country at the bottom of the world. You know, we’re 4.7 million people. No one owes us a living. You know, if we’re going to go out and make money in the world, we’re going to have to sell things to hundreds of millions of middle-income consumers. I mean, we might get rich selling things to 4.7 billion people. We’re not going to get rich selling things to 4.7 million New Zealanders. So that’s the argument for it.
But, you know, one thing I’d say about the United States is, I mean, yes, it’s technically true there are definitely winners and losers. So if you look at the dairy debate, the commercial part of the dairy sector in the United States is massively pro-TPP because they think they’re going to be very successful in places like Canada. You know, they absolutely—and they’re right to be optimistic.
The smaller dairy farmers in America are opposed to TPP because they’re concerned about the threats from New Zealand and others, even though those threats are, to be frank, pretty modest.
But the main point I’d make to you is not so much that economic gains are necessarily so massive initially up front for the United States because, if you think about the 12 countries involved, by far the largest market of those is clearly the U.S. So, you know, they don’t get any gain from that. They do get gains into Japan, but, you know, outside that, the other countries that are emerging are smaller. But the real point is, A, who might join. So, if China joins, if Korea joins, if Indonesia joins, it gets a lot more interesting. That’s the first point.
And the second point comes back to what I said earlier. If you take New Zealand wine—(inaudible)—1987, when the market was closed, we—it was very difficult to import wine into New Zealand. It was very expensive. We produced wine and it was awful. I know because I drank some of it. (Laughter.) It was truly awful.
ORSZAG: Much better.
KEY: OK. Now—exactly. So what happened was all of a sudden, you know, the floodgates literally opened. New Zealand had to compete. So they went out then and they got onto sauvignon blanc, realizing New Zealand would be a great place to grow there. Now, you know, the largest-selling white wine in Australia is the New Zealand Kiwi sauvignon blanc. I mean, it’s living testimony, you know. So all of a sudden what happened was it forced New Zealand companies to innovate and to be creative. And that’s true in the wine industry and it’s true in every other industry.
So, you know, will the United States be the powerhouse of innovation and creativity if it stops competition with the emerging nations of Asia? I think not. In fact, what they’ll do is initially they’ll be protected from that because of the barriers that will be put up because they’re on the trade deal. But all that does is over time make you less and less competitive. And the long-term implications for the United States are very profound.
ORSZAG: Let me also ask you, on a related topic on immigration, because you noted in your opening remarks net migration into your country—working-age population grew by 2 ½ percent last year in New Zealand—
ORSZAG: —mostly because of net migration. There are raging debates, both in this country, in Europe, even in Singapore—
ORSZAG: —and elsewhere about immigration. Do you think it’s solely that most of the migrants into your country are coming from, let’s say, Australia? Or is there something else about the political debate in your country that seems to be—or is it as controversial in your home country as it is here?
KEY: No, it’s a debate. It’s definitely a debate. It’s not at the level we—you probably saw—you know, if you accept it was one of the driving factors for Brexit, if you accept it’s been one of the core planks of Donald Trump’s sort of campaign, then it’s not at that level. But there’s no question there is a debate.
But having said all that, I mean, this is what I would say, firstly, is that if you think about New Zealand, it’s a big land mass. It’s the size of Great Britain. So Singapore has 7 million people and it’s the size of Lake Taupo, one lake in New Zealand. You know, our whole country is the size of Great Britain and we have 4.7 million people.
Secondly, migration goes in waves. So we don’t have the uncontrolled migration effect that they have in the U.K. So if you look in the U.K. last year, I think of the 660,000 people that flowed into the U.K., about half of them were just people that came from Europe; they had no control over. The only people we can’t technically control is Australians. They have free access to the labor markets. Everybody else has got to get points. They’ve got to come in either because they have the skills or they have the—you know, we give them a working holiday or whatever it might be.
So our argument to New Zealanders is, yes, the levels are a little high at the moment, and it’s putting some pressure on infrastructure and the housing market. But equally, the benefits of all of those skills and that investment that comes in is worth it. And anyway, this is a cycle. And even the New Zealand treasury thinks within two years net migration will be running at 12,000. Now, we think that’s a little low, but we think we can control it. But it’s definitely a debate. And if the Singaporean prime minister was here now, he’d tell you that one of the reasons that Singapore is growing at much lower rates than they normally are is because migration is choking off the labor supply and they don’t have the capital, the human capital, to grow.
ORSZAG: Right. So you mentioned agriculture. I think sometimes it’s easy to exaggerate. I mean, New Zealand is more than one big farm.
KEY: Yeah, absolutely.
ORSZAG: So agriculture is something like 10—even with—
KEY: Yeah, two big farms. It’s two islands, you know. (Laughter.)
ORSZAG: Two big. But obviously that’s very sensitive to the climate—
ORSZAG: —and to El Nino and what have you. And so, in that context, is the world doing enough to tackle the risks associated with climate change? And if not, what is the path forward from here that you think that’s practical?
KEY: Yeah. So I think you can take a lot of optimism out of two things; one, the Paris accord, obviously, where you saw, you know, reasonably ambitious targets set. But the second thing I think you can take real confidence from was the China-U.S. agreement, because the China-U.S. agreement was what led, ultimately, I think to Paris being successful.
I mean, the interesting thing with New Zealand is, we are one of the few countries in the world that has—well, I think the only country that has this. For a developed country, we have a developing-country profile when it comes to emissions. So 50 percent of all New Zealand’s emissions come from agriculture—you know, basically, you know, animals. And unlike most other countries, where it comes from energy, we are 82 percent renewable. The government wants to be 90 percent renewable by 2025. So the reason for that is that we have an abundance of hydro, we have a lot of wind, solar plays some part, and we have geothermal.
So, when you think about New Zealand, we can’t change our energy mix other than a little more positively, but that’s not having a big impact on our climate profile. We don’t have really heavy-duty industrial manufacturing. We have—we have some manufacturing base, but it’s not dramatic. Our transport fleet is increasingly becoming more efficient because of both everything from electric vehicles to higher emissions standards.
So, for New Zealand, the big challenge is: how do we get on top of that huge mass of emission that comes from agriculture? We already have an emissions trading scheme in New Zealand, so—it’s quite successful. So what I’d say is the answer has to rest with technology. So, if you’re a believer that science and technology will resolve these issues, then I think you can take a high degree of confidence that we will meet the levels of emissions that the world needs to achieve—so, 1 ½ percent, certainly less than 2 (percent).
And I think you will, because years ago, with the Americans and others, we set up a thing called the Global Greenhouse Gas Alliance. There’s now over 35 countries. And we have scientists from around the world looking for solutions to meet—(inaudible)—emissions. If you don’t believe in that, then you’ve got a real problem.
But, see, this is the challenge for New Zealand, is that we could cut our emissions profile by destocking, but all that would happen is that those animals would be bred in some other part of the world and it would have zero impact. In fact, actually, we have a lower carbon footprint per animal than most other countries.
ORSZAG: So one final question before I open it up to our members, on the economy.
ORSZAG: ANZ Chief Executive David Hisco has said that there is a massive housing bubble in New Zealand, especially in Auckland.
KEY: He’s lending to it—(laughs)—if that’s the case. (Laughs.)
ORSZAG: (Laughs.) Yeah. But I guess, how worried—you know, where do you—so, between housing, the need to raise savings, the need to improve productivity—you have a productivity commission—what are you—what are the—you painted a very positive picture, which I think is appropriate for the economy. But where are the areas of concern?
KEY: Yeah, OK. So housing—this is what the story has been with housing. So housing is, for the most part—Auckland’s the commercial capital of New Zealand, it’s home to 1 ½ million people, and that’s where the housing issues have been pronounced. So, in the nine years where the previous government were in office, national house prices went up a bit over 100 percent. And in the eight years I’ve been prime minister, they pretty much went below—under 50 percent. So the issue has been in Auckland, where the increases have been broadly 90 percent under each government. And obviously, that 90 percent on the nominal rate is clearly a lot more.
So what’s been driving that has been a few things, but most of them has been that the old planning laws restricted land access and the supply of land. And so what you had was the obvious market impact, that a section in Auckland in 1992 cost 100,000 and today costs 450,000. So, if you go and buy a, you know, three-bedroom new house in Auckland, well, the average house price is a million Kiwi, so it’s 750(,000) U.S. If you go and buy that in, say, Myelitra (ph), which is just nestled on the edge of Auckland, you can probably buy that for a—that three-bedroom house for about 8(00,000) or 900,000 Kiwi, so that, say—let’s call that, I don’t know, for want of an argument, 700,000 U.S. We were in Houston yesterday, and I said to them, what can you buy a three-bedroom new house in Houston for? And they said, well, there’s good Houston and bad Houston, but 350(,000). So you certainly go, well, why can you build a house for so much less, and the answer is scale but also land. So, yes, it’s an issue.
Is it a bubble? Average house prices in Auckland are nine times earnings, which are, you know, we would say too high. But there’s a direct correlation between interest rates and house prices—interest rates low, confidence, high, unemployment low, house prices high. In Sydney they’re 12 times. So I would say Sydney’s got a far more pronounced problem than Auckland.
So it is an issue. But the one thing I would say is, if you look on those GDP numbers that we were talking about, there’s been massive growth in the construction sector. So at its—probably this is at its worst, but nevertheless factually correct—when I first became prime minister, they built 10 new houses a day in Auckland. Today, they build about 45. And we’re on our way to probably 55 or 60. So there’s a big construction boom that’s been occurring, and there’s a lot of supply coming. But it is requiring changes in a number of things, not the least of them being the acceptance of people to both allow redevelopment on brownfield sites, new sites to be opened, new infrastructure to be built to cope with that, and more people living in apartments.
All right, let’s open it up to the members. Let me—just a couple of reminders. First of all, this meeting is on the record. Second of all, please wait for the microphone and then identify yourself. And please actually ask a question rather than just making a statement.
Why don’t we start right here?
Q: Thank you. Earl Carr representing Momentum Advisors. And thank you, Prime Minister, for your comments, as well as your public service.
I had a question regarding China. Do you believe China will join the TPP? And if you can kindly give your assessment, if China were to join TPP, how would that impact trade between China and New Zealand? And if China didn’t join the TPP, what would be the implications for trade between the two countries?
KEY: Yeah, so I think the Chinese themselves haven’t decided formally whether they will join, but they ask a lot of questions about TPP. They’re interested. And they are part of RCEP, which is, you know—obviously, the East Asian Summits also—multilateral agreement. And I think most people who would look at RCEP would say it’s moving very, very slowly. So whether RCEP can really get over the line in the current environment I would say is more challenging than TPP, if it can get ratified, the Chinese joining it.
And I think the Chinese economy is changing dramatically, as I’m sure you’re probably aware. It’s becoming a more services-based economy. It’s focusing a lot more now on domestic consumption. It’s becoming far more science- and high-tech-focused. And it’s jettisoning its heavy manufacturing. In fact, we’re seeing a lot of manufacturing coming out of China, back to New Zealand. It’s quite interesting, a lot of New Zealand companies doing well on that front.
So I think myself they will join. I don’t think they have made that decision yet, but I think at some point down the track they will because they’ll embrace trade, because they’ll want to really have access to those markets. When, I—when, I think, is I don’t know.
In terms of New Zealand, it probably doesn’t have a tremendous impact from New Zealand’s point of view because we’ve got this comprehensive FTA. We’re trying to upgrade the FTA at the moment. But even if the FTA with China doesn’t get upgraded, there are a variety of different tariffs, and those tariffs run off by 2022/2023. So either we do the upgrade, in which case we get the benefits a bit early—and there’s benefits on both sides—or, alternatively, if just naturally occurs. So I think for New Zealand it doesn’t make so much difference.
I think for the other countries—the United States and the like—then it does matter. And I think, if you don’t think TPP matters, then you either don’t really believe in trade, or you think the WTO can resolve your issues. And to me, there’s no evidence to show that the WTO’s making any progress at all on Doha. And so, on that basis, TPP to me is the only game in town, really.
ORSZAG: You know, on a related question just quickly, if in the bad scenario the U.S. does not pass the TPP, do you see some kind of regional trade deal still occurring—TPP without the United States, perhaps with China, which is probably the worst possible situation for the United States to find itself in?
KEY: It’s not impossible. It’s not being talked about, but it’s not impossible.
One of the challenges, I think, is that, for most countries in the TPP, part of the big prize is the United States.
KEY: So, for us, for instance, we already have an FTA with quite a lot of the members of TPP. So where we are really interested is China and—so sorry, is the United States and Japan. So, if the United States is not there, then that’s a bit more challenging for us.
ORSZAG: Right here.
Q: Thanks. I’m Lucy Komisar. I’m a journalist.
Well, the TPP is the hot-button issue, with millions of people across the globe demonstrating against it, and even our two presidential candidates are against it. President Obama has to depend on (corporate/cooperate ?) Republicans, because the liberal Democrats are against it. Now, as you had indicated, there’s concern about jobs, and a lot of jobs have hemorrhaged out of the country because of the previous trade agreements. But, as Peter indicated, it didn’t seem like it was going to result in a big-money change. You gave some statistics. But the real concern is that the investor-state dispute settlement mechanism would challenge—take away sovereignty of the United States and other signers the ability to control environment, health and workers’ right in order to protect the current and future profits of corporations. Why should we give up our sovereignty so some international corporations, some of them monopolies or near-monopolies, can make more money?
KEY: Yeah, so OK, if you look at ISDS, investor-state dispute resolution, I reckon the argument it takes away sovereignty is absolute nonsense, OK? So New Zealand’s had investor-state dispute written into its FTAs, all of its FTAs in recent times. There has never been a case taken against New Zealand. There’s never even been a case contemplated against New Zealand in investor-state.
So OK, so when the argument is that a foreign corporation can sue you, well, I mean, to get a—to get a case up under ISDS is very difficult. Probably you’d (rather ?) get it without it anyway. And I can’t think of conditions under which that would happen from New Zealand’s point of view.
So when people say, OK, ISDS will mean that you lose your sovereignty, I don’t understand what they mean by that because then, when they get up in New Zealand, they say, ah, well, they can—they can have input into our lawmaking. Well, in New Zealand, when we pass a law, the way that works is a bill goes into the House for the first time, has a reading. After it’s been read, it gets generally sent to a select committee. Well, yes, it’s true, a U.S. corporation, if we were part of TPP—and actually, frankly, without it—could also make a submission to that select committee. But that doesn’t mean that the Parliament has to accept the recommendations that that particular company might advocate for.
So in that case, the reason we quite like ISDS is that if we have a situation where there’s a genuine dispute from a New Zealand—(inaudible)—offshore, it allows us to take a case—or for them, at least, to take a case in a neutral and fair jurisdiction. And there are some jurisdictions around the world where you have very low levels of confidence that the judge and the judicial system was fair, balanced and unbiased.
So there are cases around ISDS the world. There’s a pretty famous now in Germany around nuclear power now. But as a general rule, I think it’s one of those things that is put up as a sort of bogeyman, but when you talk to people about it, they just come up with a slogan, say you’re going to lose your sovereignty, but they just can’t answer what that means. And that’s because—
Q: (Off mic)—companies forcing countries to move back on things like packaging to warn people that smoke that they shouldn’t smoke. That’s happened.
KEY: OK—yeah, OK. So that’s also nonsense, in my view. So if you go and have a look in Australia, Australia basically—British American Tobacco I think it was took the case—or Philip Morris took the case the Australians. They already have an FTA with the United States of which they have investor state, and they couldn’t get it through the investor state rules they had in Australia. So what they ended up having to do was to go around the back door and register in Hong Kong to get it through a deal they had in Hong Kong. So ISDS is not the thing that’s leading to the plain packaging. And the advice that the New Zealand government has is that we can proceed with plain packaging, which the New Zealand Parliament’s also considering at the moment, even though ISD is written into TPP.
ORSZAG: And is there any material—just because this is such a hot-button issue—is there any material difference in your opinion between the ISDS that’s in the TPP and the existing ones in other agreements?
KEY: And we have ISDS with China. We—(inaudible)—with China.
ORSZAG: Why don’t we go right here?
Q: Jeff Laurenti.
Mr. Prime Minister, I’d like to ask if you would explore a bit further the implications for the Americans of our real goals in the TPP because as Peter said, economically this is not being sold as—going to have any major impact for the U.S. economy. Rather, the arguments usually here are, one, we’ll make the Vietnamese finally respect labor rights, which is a good thing, and then second, we need this for a larger overall architecture of American leadership for the Pacific.
And I was struck that in your remarks, you never raised the bogeyman of China, which is a consistent part of much of the American discourse about the geopolitical strategy and thinking behind TPP. To what extent do you think that the American concern about rising China that needs to be contained—which some of us remember from 50 years ago; it led us to a different kind of involvement in the region—is overblown? And do you see a fairly serene integration of China into the leadership ranks of the international community, whether on the Security Council that you’ll be presiding over this week or wherever?
KEY: OK, so I think there will have been some people who would have been in the United States of the view that TPP was a good idea as a containment policy for China, that, you know, there may have been people in the administration thought it was a good idea, may not have been—you know, I just don’t know, but there’ll be different motivations in different individuals.
If that’s the motivation, then it’s probably not going to work because whether you like it or not—personally, it doesn’t worry me, but I understand people’s concerns—China is growing. It’s rapidly emerging as an economic superpower. And yes, while its economy is going through all of those natural changes that occur as an economy grows rapidly like China is, fundamentally, its sheer momentum is going to carry it over the line as an economic superpower. And so it’s the second-largest economy in the world, as we know. And I don’t know when the crossover point is where it’s nominally larger than the U.S., but, you know, it’s in the foreseeable future. So if it’s solely about containment, then I don’t think that will work.
It should really be about engagement, and engagement because of the opportunities—I mean, you go 1.35 billion people living in China. You’ve got this mass middle market that’s emerging. And U.S. companies want access to those consumers. And that’s what we see in New Zealand. We see this very large consumer base. We see them buying value-added products. And we see them moving up the value curve quite dramatically.
So, I mean, look, I think—I think the broader issue, though, is, you know, we always believe in New Zealand that countries that trade together, you know, for the most part largely remain peaceful together. You know, we think a world that’s engaged with each other, there are real benefits to that, you know. You understand each other. You have more reasons to talk to each other. You have more reasons to engage with each other. We think it adds to global stability and peace.
And if you think about the world and say, what’s happening, you know, you can look at Europe, and I think for all of the good and bad and ugly in Europe, it’s not growing, and it’s not growing to grow anytime rapidly because it’s got very strong structural rigidity which is holding back that growth. And it’s not going to be easy for Europe to grow, I don’t think. I mean, you’ve just got real challenges there. And so then you look at the United States. Well, it’s an efficient economy, as you know.
So the other part of the world that’s—and part of the world that really got us through the global financial crisis, you know, as a strong proponent of growth has been Asia. And can the United States seriously, as the largest economy in the world, say I’m going to be disengaged from that growth? Because it’s not just China, is it? I mean, it’s Indonesia, home to quarter of a billion people, where the population is very young. As you pointed out earlier, it’s Vietnam. Vietnam’s labor markets and the need to improve its labor laws, you know, you’re right about that. But that naturally happens as a country becomes wealthier and more engaged. I mean, China’s labor market practices will be improved on.
So I don’t know, to me I just sort of think it’s both opportunity and realism. And, you know, we think the United States, it’s a great friend, it’s been a long-term historical ally of New Zealand. They have a lot of friends in the region. And we think the more that China and the United States and other countries are engaged with each other, the stronger and safer the world is.
ORSZAG: Let’s go over here. Gentleman right here.
Q: Thank you, Mr. Prime Minister. Dick Huber from InVina Wine Group.
And we admire your wine-making so much—(laughter)—
KEY: Yeah. You bought it.
Q: —that we have shamelessly copied your style in our sauvignon blanc. (Laughter.)
But my question is really much more domestic and related to the fact that, as I say, my operations are in Chile, and we have some similarities with New Zealand, one of which is, who’s going to pick the grapes? We have very little immigration. We do have immigration, but it’s college professors. It’s doctors, lawyers, Indian chiefs. We don’t have laborers to work our agriculture, which we’re very dependent upon, as are you. And I think you have some similar problems. I just wonder what your magical solution has been.
KEY: OK, so certain—firstly, A, technology helps you, doesn’t it? I mean, if you have a look across all the things we do, you know, robotics and all of those has had a profound impact. And I accept that, you know, the (topping ?) grapes are not going to be picked by a robot because it doesn’t add to the story as much as anything else. But nevertheless, yeah, we see amazing efficiency in our primary production area.
But interesting, that from New Zealand’s point of view—and I don’t know whether this would ever work in the United States or not—but we run a scheme called RSE, Regional Seasonal Employment scheme. And it was set up by the previous government. It’s been one of the most successful foreign policy things we did. So what did is we went to our Pacific island neighbors—you know, Tonga, Samoa, Vanuatu and the likes. And we said: You send workers to New Zealand. They come for a period of time. Usually it’s nine months. The vineyard or the apple grove or whatever provides pastoral care around them. So usually it’s accommodation for them, say. And they work six days a week. And they agree to go back after the period of time that they’re in.
And it’s been a huge source of both remittance and very high-quality labor in New Zealand. Now, they have to be paid according to New Zealand labor laws. So we have a minimum wage, you know, $15.25 an hour, et cetera, et cetera. So they have to meet all those conditions. But it’s been hugely successful. And when it first started under the previous government I was a big skeptical, actually, that it would work, that people would actually go home and that they’d want to work this hard, or they’d want to keep coming back. But it’s been very, very successful.
So in a lot of ways, if you think about—you know, I know there’s a very hot debate in the United States about Mexican workers and illegal workers in the U.S. and all that sort of stuff. But a lot of those workers will be providing the sort of relatively low paid manual but high-demand work in the United States. And that’s the reality. They’ll be mowing a lot of lawns and picking a lot of fruit and doing a lot of different things that you actually need. And maybe a way of resolving that is to work on, you know, a number of schemes. But one of them would be a scheme where people do come for a while and do actually go home. Because a lot of people want to go home. There just want to be able to have some resources to take home with them.
ORSZAG: Let me go over here.
Q: Herbert Levin, Council member.
Some years ago a number of countries, particularly Japan, said they did not want any nuclear weapons into their country—either in the country or on American ships visiting. And so President Bush said: Take them off the ships. American ships had always gone to New Zealand. But the next time they showed up, the New Zealand government said, no, we don’t want your ships unless we inspect them to make sure there are no nukes onboard. And the U.S. Navy said, well, ordinarily people don’t inspect our ships, and they didn’t go in.
The reaction in the U.S. was, well, let’s get rid of the defense agreement with New Zealand, but the Australians, if I must quote their customary rudeness, said: Well, the Kiwis are acting weird, but maybe they’ll have another election and they’ll sober up and we can go back in there. Meanwhile, come on over to Sydney, mate, and you have a good time here. And it would cost a fortune to move the backstop for Deep Freeze to Tasmania. So we said sort of, tell hell with it. And that was the end of defense cooperation with New Zealand. And no New Zealand visitors have been in the newspaper showing up any place with guns and security problems in the Middle East.
So my question, Prime Minister, is: Is New Zealand useful to the United States for anything except lamb chops? (Laughter.)
KEY: Right. OK. I’d probably tell the story slightly differently than that, but yeah, OK. Well, you’ve given sort of—a few sort of similarities, I guess, of the facts there. (Laughter.) So, OK. So what happened was New Zealand did pass antinuclear legislation, right? And that antinuclear legislation essentially said that while nuclear—while you could have nuclear material for, you know, a hospital—you know, very small amounts—but, that’s right, you couldn’t have—you can’t have nuclear power, you can’t have nuclear-powered weapons, you can’t have nuclear-powered vessels coming to New Zealand.
And post that, what happens is if a foreign ship or a foreign plane, which could be nuclear-armed—as in nuclear power or nuclear armed—if I could be, technically, comes to New Zealand, the prime minister of the day has to sign what’s effectively a waiver that the advice I’ve had is it conforms with New Zealand law. So we don’t have a—the Americans have a neither confirm nor deny. And we don’t have necessarily a policy that says you have to ask, it’s just that as prime minister I have to be confident that I’m complying with New Zealand law. So you’re absolutely right that that lead to the standoff. And what happened was you didn’t see another ship coming to New Zealand. So initially after—right after it happened the Americans, they sent the Buchanan down. She never came. And there has never been another U.S., you know, Navy ship since then.
So what happened was we had our 75th anniversary of the navy. And that’s taking place in November of this year. And we invited all the navies from pretty much around the world. And so we sent an invitation to the Americans. And we said, would you like to come? And, yeah, it’s a long, involved process, but eventually they said, yeah, we would. So they are sending a ship. I will have to sign the waiver that says it’s going to conform. But as you probably know, through open source material, I think, you know, it’s only really the subs and the aircraft carriers that are either nuclear armed or nuclear, you know, driven. Anyway, they’ll send something that conforms with our law.
OK, so that gets you sort of the first bit, sort of how it operates. And I think that was really the last—you know, President George W. Bush talked about, you know, there being a rock in the road in the relationship, and they found their way around the rock in the road. And this is the last sort of vestiges of, you know, the sort of antinuclear legislation. So the relationship is in amazingly good shape. The defense arrangement we had was with Australia and the United States. It’s called ANZUS. And New Zealand suspended its role in ANZUS. And I don’t think there’s any chance that we will reestablish that. So we now run an independent foreign policy. We decide our own, you know, things, and whatever we do.
What I think would be pretty harsh would be to say New Zealand doesn’t pull its weight as a good international citizen, which includes supporting the United States, if you like, but not solely because it’s the United States. So, for instance, in my time as prime minister, I’ve deployed the SAS to Afghanistan on a number of rotations. We had a large reconstruction team in Bamyan Province. As prime minister I sent about 145-150 personnel to Taji Air Base in Iraq, where we trained Iraqi defense forces with the Australians and the Americans that are on that base. We are part of the Five Eyes partners together. So with, you know, Australia, and Canada, and the U.K., ourselves, and the United States, we share intelligence. So we have a very strong level of cooperation. And through all of that, actually, the Deep Freeze Operation in Christchurch was maintained. And in fact, we’re both on the Ross Dependency at, you know, McMurdo and the New Zealand base, Scott Base.
So, you know, I think, myself, it’s different probably than what it was when we were, you know, allies in World War I and World War II and the like. But actually, you know, we’re—we’ve, you know, got a great relationship and it works very well. But I think New Zealand pulls its weight on the world stage. And I think we can be proud of what we do. But we’re a small country and it’s never going to be the size of the U.S.
ORSZAG: We’re going to take one more quick question from the audience. But just quickly, since we’re on the topic of somewhat awkward questions, let me just ask—(laughter)—the country did go through an elaborate process to redesign the flag—
KEY: Oh, yeah, yeah, yeah. OK, yeah. I lost that one.
ORSZAG: Why was that important? And what lessons, if any, did you take from its defeat?
KEY: Yeah. So the launch on this. We’ve had three flags in New Zealand’s history about—the most recent time since the early 1900s we’ve had a flag which looks a lot like the Australian flag. There’s a Union Jack in the corner, you know, four stars. Australia has five, I think, and they’re white. But broadly, it looks about the same. So to put a bit of perspective on how confusing this thing can be, and how people make mistakes, I went out to—when I was in Indonesia recently we went to Fonterra, which is our, you know, massive dairy company that’s this, you know, kind of powerhouse company of the New Zealand economy. And I was greeted by a bunch of Australian flags they were waving. So, you know. (Laughter.) And the number of times I’ve been—you know, been at press conferences overseas with the Australian flags being in the air and, you know, it’s unbelievable.
So the long and short of it was I think New Zealand is—what they know New Zealand by is fern. And it’s because of the prowess of our sporting teams, not just the All Backs, but if I show you a silver fern there’s a reasonable chance you’ll know it’s New Zealand. If I show you our flag, there’s a very limited chance that you would actually know it was New Zealand. So they did a little thing here when we were trying to change it. They went into Times Square and they asked 50 people what flag—(laughter)—what country is this flag, you know, from, right? Only one person got it right, and they were an Australian tourist on holiday. (Laughter.) And they had to guess. They had to guess, right? OK. (Laughter.)
So just to be living testimony—and I said to my staff when we were walking down the road yesterday—because we went for a bit of a walk when we arrived, we went down to Times Square to soak it all up—just living proof that, as I tried to tell them—(inaudible). I say it a lot. As we walked down the road, there were these Kiwis. They were obviously Kiwis. I mean, they didn’t see me, but they were Kiwis. And this guy was walking down the road and had a backpack, and what did he have sewn on his backpack? It wasn’t the New Zealand flag, but it was the silver fern.
Anyway, we had a referendum, and I lost. (Laughs, laughter.) So we lost 57-43. It was much closer than any poll you ever saw. But I just thought, if you look in the United States, in the United States you have overt signs of patriotism—I mean, U.S. flags everywhere, you use the flag in everything you do. It’s great, you know. You know, like, you’re just screaming to the world: I’m American and I’m proud of it, you know? And I just think, in New Zealand, we’re very patriotic people, but we don’t use our flag to promote the country. And so I thought if we had the silver fern there it would be a great way of showing the world that we’re proud of New Zealand.
ORSZAG: Fair enough. And actually, you know what, I think on that note we can end things.
KEY: OK. No problems, OK.
ORSZAG: On that positive note. Thank you all for coming, and thank you, Mr. Prime Minister.
KEY: Thanks. My pleasure. (Applause.)