Saana Consulting Interview Series #3: Sir Lockwood Smith

Saana Consulting’s interview series for the TKE offers readers unique, insider-perspectives from top trade negotiators from around the world and sheds light on some of the most pressing questions relating to the UK’s future trade and investment strategy. In this series, our experts share insights and lessons for the UK as it seeks to build the capability to navigate the Brexit process, negotiate a network of global trade agreements around the world, and take up its new role within the WTO. In the third interview of the series, we spoke about Brexit trade negotiation strategies with the Rt Hon Sir Lockwood Smith KNZM Ph.D, former New Zealand High Commissioner to the United Kingdom.

February 2017

How can the UK Government build its trade negotiation capabilities (quickly)? What sort of training should the new trade negotiators undertake

It’s an interesting challenge because the EU has handled all the trade negotiations for the UK over the last forty years, so there is somewhat of a skills deficit. New Zealand recognised this very early on, and we’ve been doing what we can to help share our experience. What we found with trade negotiation work is that you learn an awful lot on the job. We have some in-house training programs that help develop the fundamental skills required and we’ve shared that material with the UK. In fact, the UK is the only country we’ve shared that material with. In addition to the in-house training, New Zealand has some training programmes run by external contractors, which the UK also has access to. Some of our trade negotiators also up-skill by attending courses at international institutions to get global input and insights. But as I said at the outset, there’s no substitute for learning on the job. Nevertheless, experience does matter and we’ve been prepared to share that experience with the UK.

I think so much around this though is not just having skilled trade negotiators, it’s having a clear global trade strategy before you even start. That is crucially important. New Zealand has had a global trade strategy these last 20-years that we’ve been pursuing. Just recently we’ve reviewed and updated our strategy to set the direction of our trade policy for the next 10-15 years.

During trade negotiations the UK will also have to negotiate with itself, in a sense, on what policies to adopt and what path to follow. What can the UK Government do to ensure these departments have the capacity and capabilities to deal with the demands of Brexit, and other trade negotiations?

I think understanding the domestic economy, involving all relevant departments and making sure they have a common understanding is fundamentally important to developing a good trade strategy. Because too often you can get different departments viewing things differently and operating in silos. In New Zealand, our Ministry of Foreign Affairs and Trade leads our trade work but we also have several other departments contributing including Customs, the Treasury, the Ministry for the Environment, the Ministry for Business Innovation and Employment, and obviously, our Ministry of Primary Industries. Every country has different structures, including the UK, but the key is that all those different departments have a common view of where the economy is positioned and the objectives of the trade negotiations.

What other elements are important in developing a good trade strategy?

It’s important strategically to assess where you’ve got like-minded partners and potential partners globally, and which of them hold the most potential in terms of getting the earliest possible gains for your economy. It’s not necessarily going to be through negotiating with the largest economies. From the UK’s perspective, one might conclude that two of the big economies are, for example, the United States and then, looking to Asia, either India or China. From a strategic perspective, negotiating with some of those big players may or may not be the smartest place to start. New Zealand obviously is a much smaller economy but it’s like-minded and has a very open economy. So, starting with a country like New Zealand you could set the standard for FTA outcomes very high, which is critically important. If, in an attempt to secure a trade deal with a large economy, the UK ended up with a poor deal, that’s something it could regret for the next 20 years. I cannot stress enough how important it is to make sure that the trade agreements you put together are building blocks towards a globally liberalized trading system, not stumbling blocks. That again emphasises the need for a strategic approach and the importance of having a clear plan.

Secondly, our experience is that it’s really important to have a strategy that embraces not only bilateral agreements but also plurilateral agreements and multilateral agreements, which offer the greatest benefits. Something that New Zealand has done that has been really interesting, is we initiated what became the Trans-Pacific Partnership (TPP), which, despite some reports, is not dead yet. While the United States is clearly not going to be part of it, there are on-going discussions about what the other 11 members of TPP want to do and it could proceed if that’s what the members choose. The TPP started out as a bilateral negotiation between New Zealand and Singapore, with the whole idea being to establish a high quality, open platform that others could join. And so that’s been a critically important part of our strategy, taking a multi-level approach encompassing bilateral, regional, plurilateral and multilateral trade negotiations.

Finally, another important component of a trade strategy, at least in New Zealand’s case, is unilateral reform. We haven’t waited for other countries to negotiate with us before we make changes, we’ve just gone ahead and done it and the benefits from that can be really significant. Many fear that opening up your economy to global competition can be negative, but you only need to look as far as the New Zealand wine industry to see a different story. Wine was protected by a 40 per cent tariff in the early 1980s, meaning you couldn’t import cheap wine. Because of that protection New Zealand wine was so bad you couldn’t export the stuff. Then in 1995, in one year, the government eliminated the 40 per cent tariff and unilaterally opened up the market. They provided some cleverly designed transitional assistance to wine growers, which saw them replace the existing varieties with varieties better suited to the conditions, such as Chardonnay, Pinot Noir, and Sauvignon Blanc. Since the industry has had to compete on a global scale, the transformation has been staggering. Wine is now our one of our largest exports and we command the highest average price of any country here in the UK market by quite a margin. And that’s all quality-driven through competition; and the environmental standards are far higher than ever before because if you’re selling a high quality product it’s got to have a good environmental story behind it.

What impact do you think Brexit negotiations will have on New Zealand’s trading relationships with the UK and EU?

We’re hugely interested in Brexit negotiations because that relationship is going to affect the world. It’s going to affect global economic wellbeing and it’s so important for the world that that the UK’s future trading relationship with the EU is a sensible, sound one. The UK’s future relationships with both the EU and the UK are critically important and while the UK-EU negotiations arguably are not a direct issue for us, New Zealand will undoubtedly be affected by the outcome. Our primary objectives are to build on our excellent relationships with both the UK and the EU, and to avoid any disruption to those relationships as a result of Brexit.

In your opinion, what would be the best approach for the UK Government to take in terms of industry engagement before, during and after negotiations? How important is it to meaningfully engage with industry?

In our experience, today’s environment requires a more intense approach to engagement than might have been necessary these past 20 years because, up until now, there has been widespread acceptance of the benefits of trade liberalisation. That’s being challenged somewhat today, in the political sphere particularly. So the need to consult with interested, and involved sectors of business and civil society is critically important. There’s also no doubt that business needs to be consulted early and, as far as possible, in a more regular way than perhaps used to be the case.

Until the TPP, we’d consult with business and then get on with the negotiations, and basically business was pretty happy, the government knew what it was doing and we’d get the job done. Then, in our experience with TPP, the government got a bit ahead of where people were at and now there is a need to refer back to business more frequently than was the case in the past. This is something that we’re certainly building into the refresh of our trade strategy. It’s not an easy task.

As so many negotiators say, you can’t negotiate these things in public under the glare of the national or intentional media. It has to be done in a reasonably sensible way, but I think it is important to engage, to make sure you bring business along with you. At times though, it’s not always possible to do that. In that respect, it’s really important that during consultations the government’s objectives and goals are made evident, allowing business to get a clearer picture of the situation at hand. For example, I think Prime Minister May’s speech at Lancaster House and the White Paper have helped the business community in the UK understand the government’s objectives and goals, which enables them get on with thinking about how they are going to work through the challenges that may ensue.

Ultimately, government has to make clear to business that while it will consult, listen and build in their thinking as much as it can, there will be no sweetheart deals. (And this doesn’t just apply to trade.) Doing so leads down a messy path. I believe that if you want to destroy an industry, you protect it. If the government does try negotiating exceptions for some parts of the economy, they’re essentially condemning it to failure because without competition it won’t keep up

Trade liberalisation often results in both winners and losers, at least in the short-run. Should the ‘losers’ be compensated and, if so, how?

Transitional policy measures are very important because one of the challenges with trade liberalisation is that when industries open to competition sometimes there is pain. Often that pain is concentrated in particular groups and in particular areas, whereas the benefits of liberalisation are spread more widely across the economy and are less visible.

Something in New Zealand’s experience that’s been critically important to our success in opening our economy through trade liberalisation has been an on-going re-training and up-skilling programme, which is a flexible system that’s widely available across a full range of industries across the country. Back in the early 1990s, when I was Education Minister, we brought in a new industry skills training strategy that enabled industries across the economy to become involved in up-skilling and industry training programs. We developed it in a way that the industries themselves could control and set the kinds of skills that they believed they needed. They took charge of where they would purchase their off-job training to make sure it was available where their industries needed it across the economy. We also significantly expanded the provision of practical training and enabled a qualifications authority to accredit a whole new range of private providers across the country that could offer up-skilling and retraining that met national qualifications requirements. Looking back, I think it has worked reasonably because it’s allowed people to access the up-skilling they need, even in remote places, to move from one industry to another, which trade liberalisation sometimes requires.

Undoubtedly for governments, ‘telling the story’ about the benefits of trade should be part of the engagement piece. It’s not just about engaging with business, it’s about explaining and educating the public about the benefits of free trade. New Zealand’s Trade Minister, after signing the TPP, held open discussions explaining the agreement in roughly 50 different locations across the country, which was a significant increase from previous outreach activity. It needed to be done because some strong opposition to the TPP had developed. In fact, we probably should have started that wider engagement earlier; we’ve had to adjust to the shift away from trade being a bipartisan issue.

Following Brexit, the UK is hoping to negotiate trade agreements (most likely simultaneously) with a number of countries. In a practical sense, how does one handle multiple negotiations at once?

I think it’s quite important that the UK does try to manage more than one negotiation at a time, even more than one type of agreement. It could be quite a challenge in that there will be a number of bilateral agreements they’re looking at pursuing, and that’s fine, but at the same time I think it’s worth them exploring some other developments as well. For example, we negotiated a bilateral trade agreement with Malaysia not that long ago, while we were also working on TPP. These things shouldn’t be mutually exclusive. That’s why I talk about building blocks rather than stumbling blocks because if your strategy is sound, you’ve got clear goals and everyone knows where you are heading, you can work on bilateral agreements at the same time as you might be working on a more strategic open platform. This platform could perhaps start with a few like-minded partners, such as Australia, New Zealand and Singapore, and then over time, other like-minded countries from around the world could join and build the momentum. Multilateral negotiations can prove extremely challenging so developing these open, high-quality platforms are another way of achieving a similar outcomes.

There are a number of opportunities available to the UK that could have a strategically significant impact and, in my humble opinion, I think the UK needs to be thinking about that. It is the fifth biggest economy in the world, and across the Atlantic there’s an argument that all trade agreements should be bilateral, which actually doesn’t achieve the greatest benefit. So a major player like the UK can help show how a different strategic approach, one that involves pursuing a high-quality, open platform that others could join, could have a really powerful impact on the global economy.

Strategy also matters here because it can help avoid expending time, energy and resources on things that are essentially not worth it. You can’t do everything at once, you have to focus on what’s worthwhile and meets your strategic objectives. That’s why it’s so important to be very clear about where you can make progress and where you can get the quality trade agreements. New Zealand has got miniscule resources, comparatively speaking, and that means we can’t waste our time doing things that aren’t going where we want them to go. We operate with a smallish but highly skilled team. You hear the talk of the UK needing thousands of trade negotiators and I don’t think that’s true at all. I would go for a small team of really clever thinkers, and pick the brains of those who have had the experience.

Post-Brexit, how can the UK leverage its new position in the WTO to help build consensus among WTO Members and drive the WTO’s forward agenda?

Again, this ties into that strategic approach I spoke of—making sure you understand the global players and who is like-minded. I think the UK has got a significant learning challenge at the WTO, but it has many friends who will be happy to help, so long as goodwill is developed.

The WTO issue is an interesting one. Some people don’t realise how important it is, and you hear people talk about how, if things don’t go as hoped with the EU, that the UK can just fall back on the WTO. Actually that’s a little bit misleading because the UK will have to establish a schedule at the WTO, which it can potentially do quite quickly if it keeps goodwill.

There are the country specific tariff quotas—the EU has 16 of those—then there are the MFN tariff quotas, and how all of those are handled is going to be crucial to the registration of the UK’s schedule and the potential for it to run off the rails is real. I suspect the most challenging and critical part will be the country specific tariff quotas and how these are handled. It is strategically important that the UK makes sure its partners don’t feel that the UK is in any way trying to use this situation to disadvantage other WTO members. If WTO members feel they’re being taken for a ride, that’s when trouble will start to emerge, and things could turn to custard.

Negotiating the future relationship with the EU involves negotiating with 27 members but if there’s a problem with the UK’s registration of its schedule with the WTO it could be negotiating with 162 members, and any one of them can cause a problem. The UK doesn’t need that to happen. Thankfully, I think there’s an interest in making it as smooth as possible but there is no getting away from the fact that there are really tricky things that need to be thought through. For example, the African/Caribbean/Pacific special provisions that the EU has, which the UK is very mindful of and thinking about how to handle.

Are there any other issues you think are important that haven’t been touched on?

Customs issues aren’t written about much but I think they are important to discuss. It’s my opinion—having observed these things for years—that customs unions can actually be positive and negative. They have their advantages because they lead to a much easier flow of goods and services across a border. But the downside is the fact that they kill that competitive dynamic between economies, and the bigger the customs union the more deadening that dead hand becomes. For example, if you take a customs union like the EU, it can only move so fast as all 27 agree.

When New Zealand and Australia developed our common market—and it’s a very deeply common integrated market now—we did not create a customs union and we trade perfectly efficiently without it. I believe the competitive dynamic that that has lead to in our part of the world has been hugely significant. When New Zealand wanted to negotiate the free trade agreement with China, Australia was not ready. And whether China would’ve been ready to negotiate one with Australia then, who knows? But if we’d had a customs union, the New Zealand deal couldn’t have been done. On the other hand, Australia has signed an agreement with Japan and New Zealand hasn’t, which we’re going to have to do something about, either bilaterally or otherwise. That competitive dynamic is hugely significant in my opinion.

Just because the UK will no longer be part of the EU doesn’t mean it’s going anywhere, it’s still a part of Europe. The opportunity for the UK is to develop an open, free market platform that others can join (unlike the EU single market) to bring a competitive dynamic to the region, which I think could be fascinating.

Ultimately, how we [Australia and New Zealand] handle border issues and customs issues, including through our trusted trader, risk management and single digital window approaches, can be quite helpful to the UK. It may take a little time to get the systems working as well as our systems do, but the technology is all there to do it. So I think, so long as goodwill continues to prevail all-round, this can all be made to work. To me that is what’s so important, that goodwill to help each other through a challenging time.

About Sir Lockwood Smith

Rt Hon Sir Lockwood Smith is the former High Commissioner of New Zealand to the United Kingdom. He was also Ambassador to Ireland. Sir Lockwood took up his posting in London in March 2013 and completed his posting and returned to New Zealand in March 2017.

Prior to his diplomatic career, Sir Lockwood served as a Member of New Zealand’s Parliament from 1984 until early 2013. During his time in parliament, Sir Lockwood served as a senior minister in various portfolios including Education, Agriculture, and Trade. Sir Lockwood also served as Deputy Minister of Finance, Minister of Forestry, Minister of Tourism, Minister Responsible for Contact Energy Ltd, Minister Responsible for the Education Review Office, and Minister Responsible for the National Library. Sir Lockwood was elected Speaker of the House of Representatives in 2008 and three years later was unanimously re-elected to the role, a position he held until his retirement.

Prior to entering politics, Sir Lockwood was the New Zealand Dairy Board’s marketing manager for Central and South East Asia.  He had previously been a university lecturer and also hosted educational children’s television shows in Australia and New Zealand. Sir Lockwood was educated at Auckland Grammar School and Massey University. A Commonwealth Scholar, he graduated from Adelaide University with a PhD in Animal Science in 1980. Sir Lockwood is a keen sportsperson and fitness enthusiast.  He is a trained opera singer and also ran a beef farming operation with his wife, Alexandra.