This is a subscriber-only article
Sir Lockwood Smith has plenty of experience dealing with global trade, having been New Zeland’s minister for agriculture and minister for international trade in the late 1990s.
Unsurprisingly, he is an advocate of free trade and he believes that agriculture would be better served without supports. He says that European policy makers are still arguing on how to cut up the subsidy cake.
Watch an interview with Sir Lockwood Smith in our video below:
He believes that a sustainable agricultural industry must ultimately see the support shift over time, more towards R&D and skill development and gradually away from subsidies and direct payments.
He says it is not a matter of not supporting agriculture, rather how to do it using the supports available to create a dynamic and innovative industry.
His views were strong. As a farmer himself, to be free from excessive bureaucratic red tape and government dictate would be a powerful incentive for change. “Change in this world is inevitable and it always brings opportunities”, he said.
A history of supports
The challenges faced by Ireland in light of Brexit reminded him of 1973 and the disruption New Zealand faced as the UK joined the EEC. He said that after World War II, the UK needed almost all the food that New Zealand could export. By 1972, more than half its dairy exports and one-third of all exports went to the UK.
As part of the UK’s EEC negotiations, quotas were agreed for New Zealand sheepmeat, butter and cheese access. Beyond that, high tariffs would apply.
Therefore, New Zealand had no choice but to seek to diversify its economy. He said that the accepted wisdom of the time was that in order to do so, the sector needed protection.
Protectionism invariably produces perverse outcomes
“Protectionism invariably produces perverse outcomes”, according to Sir Lockwood. One of these was an increased cost structure and farmers wanted compensation.
Supports went into overdrive in the 1970s. A livestock incentive scheme was introduced in 1977, which encouraged farmers to carry more stock.
That was backed up in 1978 by land development loans which were cheaper than standard market finance. In the same year, a supplementary minimum price scheme came in to guarantee farmers some price stability despite the decline in international markets.
All in all there was almost 30 separate production subsidies and export incentives. He outlined that by the early 1980s, the net result of all this political intervention was that the level of support was over 30%.
The situation was unsustainable. By 1984, the NZ economy was in trouble. Therefore, in 1985, almost all agricultural supports were swept away in one fell swoop with the aim to expose the New Zealand economy to the fates of international competition.
Listen to an interview with Sir Lockwood Smith in our podcast below:
Listen to "NZ ambassador Sir Lockwood Smith" on Spreaker.
Sir Lockwood said that, “freed from the distractions of subsidies, farmers’ focus returned to the realities of the marketplace”. They looked again to science and technology to improve productivity and increase profitability.
For example, while sheep numbers fell from 70m at their peak to less than 30m today, the country still exports similar amounts of lamb.
Market access, a problem since 1973, had become critical. They realised that when they were unable to make progress with the EU, US and Japan, they focussed their effort first with Australia. He reflected that “wisely, we didn’t enter into a customs union; rather, we sought mutual recognition to streamline regulatory arrangements and start building a seamless economic environment”. In the late 1990s, they started to explore how they could make more progress with Asia.
He said that “today, the world desperately needs more progress on trade liberalisation”. Trade growth has slowed following the global financial crisis.
He said trade liberalisation doesn’t need to be a race to the bottom, where you’re simply competing on price and lowering standards. He said that has not been their experience.
He gave an example of the New Zealand wine industry, where in the 1980s they had a 40% tariff protecting their wine industry. It meant cheap wine couldn’t be imported and their own wine was of such bad quality it could not be exported.
With that tariff gone, 30 years later, wine is now their number one export to Ireland and its second-biggest export to the EU.
“Free trade agreements are much more about opening minds than opening markets,” according to Sir Lockwood.
Today, New Zealand is involved in more than half of world trade in sheepmeat, yet represents only 6% of global production. Similarly, it produces just 3% of the world’s milk yet it is engaged in a third of all international trade in dairy products.
He concluded that this is all done without being in any customs union and without any direct subsidies or import protections for New Zealand farmers.
He says that it is their experience that as direct support payments were built it led to declining competitiveness over time. They acted as a disincentive to access technology and strained innovation and productivity growth.
“That doesn’t mean that all agri support is a problem,” according to Sir Lockwood, “rather it highlights the significance of where it’s placed.”
While economic gain may still have been the driving force behind farmer decision making, in the past political intervention was distorting the relationship between scientific technology and economic gain. Innovation and productivity became the victims.
No doubt without direct payments to distort the vision and with the necessity of competing in a rapidly changing global marketplace, New Zealand farmers rose to the challenge and responded.
SHARING OPTIONS: