One of the world’s most influential bureaucrats – the European Union’s Trade Commissioner Cecelia Malmstrom – will be in New Zealand tomorrow to launch the formal process of negotiating a bilateral trade pact between the EU and New Zealand. Malmstrom is currently in Australia to launch a similar deal between Europe and our friends across the Tasman. As a preview of what we can expect Malmstrom to say in Wellington tomorrow night, here’s the speech she gave to the Australians earlier this week. No clue yet on which cab – Wellington or Canberra – is likely to be the first off the rank in EU priorities.
In the very unlikely event that all will be smooth sailing in negotiating access to Europe for agricultural products from this part of the world, the EU/NZ negotiations could be wrapped up in about two years – which is relatively fast when it comes to these kind of deals. At best then, we won’t see any concrete benefits until half way through the next term of government.
There is however, a far more pressing trade problem facing this country, and Europe (via Malmstrom) is right at the centre of it. This involves the fate of our – and Europe’s – booming trade with Iran, which has been targeted with sweeping punitive sanctions by US President Donald Trump, and these are due to take effect on November 4.
Currently, New Zealand’s trade with Iran is worth about $200 million a year to our exporters. But unless the European Union can come up with a mechanism to nullify the effect of the US “ secondary” sanctions, those trade returns will go straight down the gurgler come November. Only Europe has the resources to bail the world out of this looming mess, because Trump seems to be immovable, and in no mood to grant exemptions to its friends.
Some brief background may be necessary to explain how the US can function in this way as the world’s policeman on trade. The post-war Bretton Woods agreement may have collapsed in the early 1970s, but (reportedly) half of all global trade is still conducted in dollars, and two thirds of the world’s central bank reserves and half of all cross –border debt is dollar-denominated. Also, many national currencies are either directly or indirectly linked to the greenback. In addition, the SWIFT bank system – which the US controls – is the preferred conduit for most international money transfers. As Nikkei Asian Review recently noted:
Combined with access to formerly confidential SWIFT data, a global bank messaging system, the US can exert control over global commerce and finance. This power manifests itself through sanctions which target persons, entities and organizations, a regime or an entire country.
Secondary sanctions restrict foreign corporations, financial institutions and individuals from doing business with sanctioned entities. Any dollar payment, flowing through a US bank or the US payment system, creates the necessary nexus to enable the US to enforce its diktat. This gives the US extraterritorial reach over non-Americans trading with or financing a sanctioned party. Mere threat of prosecution is effective in regulating the activities of non-Americans.
As the Nikkei Asian Review article goes on to point out, the reach of these threats is extensive. Any entity that purchases Iranian oil on the spot market, which is paid for in dollars, risks fines or worse. Then there is the question of global supply chains. “A component supplied to another party, which is assembled into oil industry machinery, transport equipment, telecommunications gear, or control software and then sold to a sanctioned entity paid for in dollars settled in the US banking system creates risk of potential prosecution.”
So, say, if New Zealand exports a component to China or Vietnam and that is included in machinery onsold to Iran, we will become liable if and when that transaction passes through the SWIFT system, or is dollar-denominated at any point in the supply chain.
What’s the solution?
Right now, Europe is caught in the middle. Given that Iran has met its side of the anti-nuclear deal, Europe has tried to keep the deal afloat by trying to ensure that European firms who have invested in Iran are not punished by severe US sanctions. ( The threat is genuine. BNP Paribas got fined $9 billion for its sanction-defying trade with Iran, Cuba and Yemen.) Clearly, neither the shaky euro or the yuan is yet in a position to challenge the greenback as an alternative reserve currency for global trade.
One potential solution that has been touted – to bypass SWIFT and US dollar-denominated trade entirely – is that maybe Europe’s central banks can function as a conduit for European companies wishing to make financial transfers directly to, and from, the central bank of Iran. Here’s the Reuters report on this proposal:
The European Commission is proposing that EU governments make direct money transfers to Iran’s central bank to avoid U.S. penalties, an EU official said, in what would be the most forthright challenge to Washington’s newly re-imposed sanctions.
And here’s the Financial Times on the same proposal.
The immediate trouble being… the European Investment Bank (EIB) doesn’t seem to want to play this role on behalf of the EU Commission. Perhaps Malmstrom can indicate whether this ‘bypass the greenback’ option is still a goer. If so, our Reserve Bank could conceivably be plugged into the same process – central bank to central bank – on behalf of our exporters, and in line with our verbal support for an Iran deal that limits nuclear proliferation in the Middle East. So far though, we have chosen to merely stand on the sidelines, wringing our hands impotently about the American actions. MFAT’s advice page to exporters trading with Iran for instance, consists of little more in the way of advice than hey buddy, get a lawyer.
The New Zealand Response
As mentioned, we have a $200 million (and growing) annual trade with Iran that’s now in the firing line. In January, a press release from the Statistics Department singled out the increasing butter trade with Iran as a bright spot in our export earnings. Regardless, governments around the world are passively letting their exporters read the storm signals, and vote with their feet. Understandably, many firms are choosing to quietly cut their losses, rather than risk becoming a target of US sanctions. Already, our firms will be weighing whether the US market or the Iran market is more important to them. No choice, really.
Surely, our government could and should be doing more. Only 18 months ago, the previous government had led a trade delegation to Iran that included these 18 firms:
NIG Nutritionals, Tait Communications, Enatel Limited, Sealord, Silver Fern Farms, Westland Milk Products, Fonterra, FrameCAD, Flight Coffee, Switchfloat, University of Canterbury, University of Auckland, ANZCO, Auckland University of Technology, Pacific Helmets, Pelco NZ, NZ Bankers Association, and Pultron Composites.
To the extent these firms followed the previous government’s exhortations to invest in Iran, they have been led up the garden path, and abandoned. Surely, the current government needs to defend a trade that has been so actively encouraged at the highest level, by its predecessor. At Monday’s press conference, I asked deputy PM Winston Peters what New Zealand was doing to counter this US threat to our export drive. The exchange went like this:
Campbell : Our exporters have resumed their booming trade with Iran. I wonder what steps the Government is taking to ensure that in November – when President Trump invokes the secondary sanctions on those trading with Iran – that this $200 million a year trade doesn’t go down the gurgler?
Peters: Well, it’s taken all the steps it can take thus far by a client who, through our allies, persuaded the US to stay. They’ve failed. We’ve not given up on trying to see whether or not the US can come back in the circumstances, which would resolve this issue. And, other than that, I can only speculate on what else we might do in the meantime.
Campbell : Well, one thing you could do, potentially, when you’re talking to Cecilia Malmström on Thursday, is that the EU has talked about creating an arrangement between their central bank and the central bank of Iran to bypass the SWIFT banking system and dollar-denominated trade to ensure that those firms can continue to trade. Would you be willing to consider that in relation to the Reserve Bank?
Peters : : Oh, well, ha! I can’t say what we’re going to—how we’re going to respond to that until it’s been put to us by that representative. She may or may not say that, and I think, if it has merit, you’ll have to look at the value of that when it happens. But I do know that the European Union’s done its best to try and persuade the United States that that’s not the right pathway down which they should go.
Campbell : So we might just lose the $200 million trade?
Peters : No, no. No, no. No, no. There’s no need for you to go into a fit of gloom and doom at this point in time. We’ve got months to see how we can turn this thing around in the interests of our exporters and the interests of our economy.’
Don’t hold your breath.
Footnote : Malmstrom may or may not have some suggestions for Peters on how the world can (a) rescue its collapsing trade with Iran, and (b) on how trading nations can preserve their freedom to trade with whom they choose, and not solely at the pleasure of the United States. One other useful thing Malmstrom can offer to New Zealand during her visit is respite from the investor state dispute settlement mechanisms (ISDS) that have contaminated our trade deals in recent years. As this column reported over two years ago, Cecelia Malmstrom has taken the lead in criticising investor-state dispute settlement tribunals, and in advocating their replacement by a standing Trade Investment Court system. As Malstrom described the problem with ISDS:
From the start of my mandate almost a year ago, ISDS has been one of the most controversial issues in my brief. I met and listened to many people and organisations, including NGOs, which voiced a number of concerns about the old, traditional system. It’s clear to me that all these complaints had one common feature – that there is a fundamental and widespread lack of trust by the public in the fairness and impartiality of the old ISDS model. This has significantly affected the public’s acceptance of ISDS and of companies bringing such cases.
So how do we create public trust, Malmstrom asked herself and answered her own question this way:
We need to introduce the same elements that lead citizens to trust their domestic courts. Concretely, I want to restore trust by setting up an Investment Court System ….one that is accountable, transparent and subject to democratic principles. It will be judges, not arbitrators, who sit on these cases. They must have qualifications comparable to those found in national domestic courts, or in international courts such as the International Court of Justice or the WTO Appellate Body.
Here’s an update on the concept.
To date though, whenever Trade Minister David Parker has been asked about whether New Zealand supports this Investment Court idea – which the EU has negotiated for in its trade deals with Vietnam, Canada, South Korea and Japan – Parker has cited (as a barrier) the potential annual cost to this country that membership of such a Court would entail. Fine. Yet it is hard to see that this annual cost could exceed the bill we pay for annual membership of other international arbitration systems at the WTO, or the Law of the Sea Convention, or the International Court of Justice etc etc.
Tomorrow, perhaps Malmstrom can update us on how many countries have signed onto her Investment Court concept, and what the current bill for membership might look like, given that it will certainly be a feature of any EU/NZ traded pact that we ultimately sign. Because, as the EU said in this fact sheet it issued last year, “For the EU, ISDS is dead.”
Horn of Plenty
Of late, there been so many female singers with synthesisers and a story to tell that Horn’s guitar-driven single “Greedy Bitch” sounds refreshingly new, and without any retro hint of old school guitar rawk, either. It is true to the source as well. Horn is Abi Macilquham, a Christchurch musician now based in Wellington, and a former member of guitar-based bands like River Jones and Wurld Series. As for the video for “Greedy Bitch”… it deals neatly with gender fluidity, in that the two figures (both the singer/guitarist and her male doppelganger) seem to be aspects of the same person who have come to play, until the point where one of them (literally) consumes the other. Yet the main points of interest here are the consistently interesting guitar lines that Abi has brought to the proceedings… and while on first listen, the rhythm at times threatens to drag, it adds weight (cumulatively) to the melody. Good song, good video. Horn is one to watch.