Hon ANNETTE KING (Acting Minister of Trade) : Today I am acting on behalf of the Minister of Trade, the Hon Phil Goff, who at this point is overseas representing New Zealand’s interests in further trade talks. But I know that he would want me to convey to the Committee his gratitude for the work that was undertaken by the Foreign Affairs, Defence and Trade Committee in examining this bill, which was recently before the select committee, and for its recommendation to this House that there be no amendment to it.

I think that members of this House have, in the main, worked very constructively on this bill, knowing that it will have a major impact on businesses in New Zealand. It allows our free-trade agreement with China to come into force. The signing of the agreement with China is a very significant achievement for this Labour-led Government.

Before the free-trade agreement was signed with China our exporters faced extra costs and charges when they tried to sell their products and services to the Chinese market, which is a very large market for us. They faced tariffs of up to 20 percent, making it harder for them to create the jobs and the wealth that can come from trade. That is because the Chinese tariffs on New Zealand products cost exporters almost $120 million a year. When it is easier because of this legislation for our Kiwi companies to do business, we will all benefit. Our companies will be able to expand and hire more staff, develop new products, and grow our economy. The Prime Minister, who has also been very instrumental in this deal, which came out of our work with China, said that the agreement sets a high standard and that it is a model for how two trading partners, disparate in size but complementary in the products and services they offer, can take a trading relationship to a new level.

Support for the free-trade agreement has come from many, many different quarters. For example, the agreement is supported by the Council of Trade Unions, the Dairy Companies Association of New Zealand, Federated Farmers, Air New Zealand, Fonterra, the Hospitality Standards Institute, Ngāi Tahu, Meat and Wool New Zealand, the National Distribution Union, Zespri, Business New Zealand, the Seafood Industry Council, the Wellington chamber of commerce, and many others. The agreement is widely supported by many organisations in New Zealand, whether they are businesses, organisations that represent our tourism industry, or part of our union movement.

The bill has two Supplementary Order Papers. One divides the bill into the Tariff Amendment Bill, the Customs and Excise Amendment Bill, the Radiocommunications Amendment Bill, the Fair Trading Amendment Bill, and the Electricity Amendment Bill, and a second one amends clause 2 to state that Parts 1 and 4 will come into force on 1 October 2008 rather than by Order in Council. The Committee is about to debate the Supplementary Order Papers and the bill itself. I commend this bill to the Committee, and once again I thank members for their very constructive approach across the political divide in supporting this legislation and the advantages that will flow from it for New Zealanders.

TIM GROSER (National) : First of all I acknowledge amongst the Government’s advisers the presence of my former colleague Dr David Walker. I congratulate him and his team on the assiduous effort they have put in over a number of years to produce this agreement, which I described yesterday—and outside the House—as of potentially historic importance to New Zealand’s long-term trading prospects.

Today as we go through the Committee stage I will start by addressing some of the arguments against the New Zealand - China free-trade agreement, and I will start with the political case against it—the linkage with human rights—which, I think, is very important. Some other arguments of an economic character, which I think are fairly weak arguments, have been used, but obviously in terms of the broader public debate and the media attention it was the linkage with human rights issues that attracted attention. It is important to have some commentary around that to put it into perspective.

In this respect it is important to define what the difference is for the two main parties and, I am sure, for some of the smaller parties. The issue is not about the primacy of human rights. I do not want to get involved in a philosophical discussion about where in the hierarchy of human needs, human rights stand vis-à-vis things like poverty elimination. The underlying reality is that members of this House are absolutely at one on the absolute importance of proper respect for human rights. I think we would all also have the view that the human rights situation in China is far from perfect. So that is not the issue; the issue is whether we should therefore have turned away at the last minute from this trade agreement because that record is not perfect. On that, we have taken the view on this side of the House, as has the Government, that that would have been a catastrophic strategic misjudgment.

I want to explain in my own language why I think that is the case. On the first point there is another debate there about New Zealand interests. I cannot recall which great diplomat of the past said this, but it might have been Talleyrand: “If you don’t look after your country’s interests, no one else will.” But that is not the point we are discussing today. We are discussing whether it is even remotely plausible that not proceeding to trade with a country—and a free-trade agreement is simply a mechanism for accelerating trade between two countries, so it does not differ intrinsically from the concept of trading with a country—would in some sense help the position on human rights.

When we start to drill down into this argument, we come across, I think, a position that is completely implausible. First of all, I doubt that there is a country in the world—no doubt, including our own—that does not have, in some dark corner of the closet, some issue in respect of human rights that we would rather not hear about and that would not stand up to close international scrutiny. Fortunately, we live in a country where such issues would be few and far between but I am sure that they exist, according to the views of many people. So if we were to take the view that we should not form free-trade areas or find other avenues for accelerating trade with countries that have a less than perfect human rights record, what would we really be doing?

For a start, I would argue that we would be excluding trade with all developing countries, because in some generalised sense it is probably fair to say that few developing countries—as much because of the greater problems of poverty and want that face them at this stage in their development—have a larger measure of problems in terms of human rights than others. We would then turn round and say: “Well, what about Australia?”. No doubt there would be people who would stand up and say that they did not think too much of the apology that Prime Minister Kevin Rudd made to the first people of Australia, and that we should therefore pull out of the CER free-trade agreement. We might go systematically through all the countries of the world and find that actually there is nobody who meets our high standards and that we should therefore not trade with them. That is the first issue. When we drill down into it I think we come up with a completely implausible position. It is essentially an argument for economic autarchy.

The second aspect of this, putting aside New Zealand’s interests, is the question of whether it is even likely that this is the right way to advance human rights. I think, then, that we have to come down to a view that says this: every country that has gone through stages of development has had serious problems in terms of human rights. We can take our children—or in my case, grandchildren—to the Tower of London, we can go to see the torture chamber, and we can find that this of course is now an object of tourist delight. Well, we know that it was not put into the Tower of London as an object of tourist delight, and that inside the political antecedents of our very own country are torture, gross abuse, lack of habeas corpus, and the lack of the fundamental freedoms that underwrite a decent society such as we have in this country. So all countries have had this in their past, or their derived past, if you will.

The idea that we can somehow suddenly achieve the standard of excellence that some submitters expect in one hit—and only when that standard has been achieved will they be in a moral position fit for a free-trade agreement with New Zealand—is, frankly, not only ludicrous, when one drills down into the practicalities of it, but also representative of a fundamental misunderstanding about how this all-important issue of human rights is advanced in the real world. Although I would never want to buy into the argument that in some sense human rights are a relative issue and cannot be divorced from the state of economic development, I think it is stretching all the empirical evidence to suggest that there is no linkage between higher levels of economic development and increasing respect for international trade.

I have never been a believer in trade embargoes, not just because of New Zealand’s interests but because I fundamentally do not believe that they work. I have often used the following example. Nobody could think of a more extreme trade embargo to achieve political objectives than the American trade embargo on Cuba that has been in place since around 1957—for over 50 years. At the time when Castro took over power, American trade was responsible for 90 percent of Cuba’s exports, but there has been a trade embargo ever since. I have always taken the view that if Fidel Castro is a God-fearing man—and he may well be, because my understanding is that he was brought up by Catholics and may now be returning to that stage in life where he starts to be a God-fearing man—I would argue that he should be down on his knees every day of his life to thank God for the American trade embargo. I do not believe for one minute that he would be in power if the Americans had overrun Cuba with McDonald’s franchises, investment, American tourists, and American trade. That is why I am deeply sceptical about trade embargoes for political reasons.

Hon ANNETTE KING (Acting Minister of Trade) : It appears to me that members would like to roam widely in this debate—

Tim Groser: Initially.

Hon ANNETTE KING: Well, I do not know, but I suspect that members would like to be able to raise all sorts of things rather than keep the debate very constrained as it is by the part by part consideration. I seek leave for the Committee to take the bill as one question so members can range across the entire debate. [Interruption] It can be as long as members want, but it means that members can talk about everything. If the Committee does not want to do that, that is fine. I noticed from Mr Groser’s very good speech that he wished to roam widely, and I suspect that Mr Hayes would also like to, as well as my colleague Keith Locke. I seek leave for this bill to be taken as one question.

The CHAIRPERSON (Hon Marian Hobbs): Leave is sought to address the bill’s five parts as one question. Is there any objection? There is objection. Before I call the next speaker, I say that since leave has been declined that means that the Committee will stick very closely to each part for the rest of the debate. I want members to talk about amendments to the Tariff Act in this part, followed by amendments to the Customs and Excise Act.

KEITH LOCKE (Green) : I raise a point of order, Madam Chairperson. Mr Groser gave quite a talk on human rights. Given that he was not stopped and that many of his comments were directed, partly, at the views that the Green Party holds, in fairness I think it would be in order for some response to be able to be made.

TIM GROSER (National) : I support my colleague Mr Locke on this matter. I think it is entirely appropriate, given the importance of this matter, for us to start with some general comments. I am well aware of Mr Locke’s views. I have put forward my contrary view, I would like to hear his response, and then I think we can proceed with a more technical and detailed examination.

The CHAIRPERSON (Hon Marian Hobbs): I want to give some considered thought to this matter. It is a problem because of the way that the member actually introduced the matter into the debate. I would really like to confine the debate to Part 1, and members may go to general debate when they come to clauses 1 and 2 at the end. I am sorry, but I am now ruling that the Committee sticks, as was voted on by members of the Opposition party, to amendments to the Tariff Act.

Dr WAYNE MAPP (National—North Shore) : I raise a point of order, Madam Chairperson.

The CHAIRPERSON (Hon Marian Hobbs): I have given a ruling.

Dr WAYNE MAPP: May I draw to your attention, Madam Chairperson, that we have had a general contribution that was intended to presage more detailed comments and subsequent contributions. That was not objected to by the Government, and it seems only appropriate that the Green Party member is also able to address this. I certainly understand the need to stick to the individual parts, as you quite rightly say, but our denying leave to the Minister’s request was not to suggest that we therefore discuss only individual clauses. This is very important legislation, and it is appropriate that we deal with the detail. But before we get to the detail, I think that members want to be able to have a general discussion, and in particular the Green Party—

The CHAIRPERSON (Hon Marian Hobbs): The member will be seated, please. You are challenging my ruling. I will say it very clearly again: the Committee voted to consider the bill part by part. Members know, as experienced members of the House, that this is not a general debate. The general debate occurs either in the second reading, the third reading, or in the debate on clauses 1 and 2. Members chose to do this by voting against considering the bill as one question. I was lenient when I listened to the first speaker. I gave the Committee the choice, and the Committee made its choice. We will now go ahead, sticking to a part by part consideration of the bill.

Dr WAYNE MAPP (National—North Shore) : Madam Chairperson, you have directed us to concentrate strictly on Part 1, and indeed on all the subsequent parts. There was no issue of a vote. Leave was sought and denied, and we simply said we would follow the rules. No vote was taken on the issue, at all. There was never a question of a vote, and I remind you, Madam Chairperson, that it is not an issue of taking a vote; simply, any one member can seek leave.

Part 1 deals directly with the reduction in tariffs. That is how the free-trade agreement works. What is the purpose of a free-trade agreement? It is to introduce free trade. What stops free trade? Tariffs stop free trade. In the trade between New Zealand and China, many goods—in particular, goods in the agricultural sector—suffer high tariffs. In addition to that, there are typically quotas, as well. A free-trade agreement by definition—and under World Trade Organization (WTO) rules—is designed to eliminate tariffs between the parties to that free-trade agreement at a faster rate than would otherwise be the case. Otherwise, the parties would be going just by their bound commitments under the World Trade Organization, and that would not be dealt with until the Doha round itself was dealt with. In this instance China and New Zealand, for strategic reasons as much as trade reasons, have decided to go for no tariffs and no tariff quotas on all trade between our nations. That will be achieved by 2019. That is the point of Part 1. That is the very particular legislation being introduced by Part 1—an amendment to the Tariff Act and the tariff codes thereof.

The remarkable thing about this is that New Zealand First is going to vote against Part 1 because it is not fast enough. One of the things I would like to know from the speakers of New Zealand First is how fast they think it should have been. Do they think there should have been full free trade between our two countries by, let us say, 2010 or 2012? I guess most New Zealand businesses would say that that would be a jolly good thing. But was it actually achievable? Was it ever likely that China would agree to eliminate all tariffs in 2 or 3 years? No, that would be an idle pretence. More particularly, New Zealand First knows the truth of that. Those members know that this is actually an excellent free-trade agreement.

If we look at the history of free-trade agreements, we will see that seldom, if ever—particularly where agricultural products are involved—are tariffs and tariff quotas eliminated completely within a 10-year period. That is an extraordinary precedent, and I congratulate the officials, led by Dr David Walker, on the extraordinary achievement they made on that. A major country like China, with major agricultural potential but vulnerable, with its small farmers, to trade from New Zealand, has nevertheless decided to allow full free trade in all temperate agricultural products, or in any agricultural products that New Zealand happens to produce—and we are an efficient producer of agricultural products. That is unlike other Asian nations that are always concerned to protect their small farmers. So China, a major agricultural producer, is willing to accept full free trade of our agricultural products, which will be started from 1 October this year. So the first changes will occur very quickly.

The committee heard from Fonterra, New Zealand’s single largest exporter, that it has already concluded arrangements worth $300 million. I also say that one of the things I have always found extraordinary in respect of ministry officials and official ministry documents is that they say there might be an increase, as a result of this agreement over the 10-year period, of maybe $300 million in trade. I have always wondered how that sum could possibly be so small.

MARTIN GALLAGHER (Labour—Hamilton West) : I will take a very brief call, because I know that Dr Mapp, notwithstanding his very comprehensive delivery to the Committee, really wants to get this bill through.

R Doug Woolerton: Rubbish! It wasn’t comprehensive at all.

Dr Wayne Mapp: Well, that’s because I only had 5 minutes.

MARTIN GALLAGHER: Well, I am sure that Dr Mapp does not need much longer than 5 minutes, but that is another issue.

I want to state the obvious in terms of the fact that we are now confined by your ruling, Madam Chairperson, to being very focused on each part, part by part; that is certainly respected. I join other members in acknowledging the excellent help of the officials, and certainly the help they gave to the Foreign Affairs, Defence and Trade Committee. I note particularly, with regard to clause 10, in which new section 15G is substituted, that “The Minister may extend a transitional safeguard measure … if the extension is—(a) consistent with the provisions of the relevant free trade agreement;”—either the China free-trade agreement or the Thai free-trade agreement—“and (b) not inconsistent with New Zealand’s other international obligations.” This seems to me to be crossing the t’s and dotting the i’s, and I look forward, in view of your ruling, Madam Chairperson, to our now having a very narrowly focused, finite debate. That is the point of the Committee of the whole House, and I always adhere to it. The broader, sweeping debate will now obviously be confined to the third reading. Thank you.

Dr WAYNE MAPP (National—North Shore) : I will continue to elaborate on the points I was making about the way Part 1 initiates the free-trade agreement by reducing the tariff schedules down to zero by 2019. It is a remarkable achievement by the officials to get that outcome in the negotiations. I note that the Government must take some credit for driving the negotiations in that way. Clearly, it takes a high-level push from the Government to be able to drive forward that level of success. I know that the Minister of Trade, and indeed the Prime Minister, were actively engaged with the Chinese Government to that effect. I think we have to consider just what a tremendous achievement that is.

I was saying, when I was closed off—if you will—that the Ministry of Foreign Affairs and Trade said there would be only a $300 million gain per year in a 10-year period—at least, by 2019. I have always thought that that is an absurd proposition. I choose those words carefully. Trade is already worth $2 billion. Is the ministry seriously suggesting that the effect of a free-trade agreement a decade from now will be only 10 percent of the current levels of trade? That does not seem credible, because it ignores the fact that it is not just about the potential gains we will get by the tariff reduction of 20 percent; it is actually about the relative advantage we will have over all other nations.

It is a well-known theory of free-trade agreements that one of the advantages countries seek is not just the growth in trade between countries but also trade diversionary effects from other countries. Although China might currently buy meat, grain, and dairy products from a range of countries, it will now divert that trade to New Zealand because we will have a 20 percent price-competitive advantage over all other nations once the agreement comes into full effect. People act before the reality of that full effect, which is why Fonterra was able to get the $300 million deal now, in anticipation, because the trend is already established. People act on the basis of the final effects, not just on the initial effects.

The second point I make as to why that $300 million gain has to be an underestimate is that once trade is boosted, total demand goes up. China is growing extraordinarily rapidly—even now, at a rate of 10 percent per annum. Even now, several hundred million people are able to spend $10 a day, or more, on advanced products in China. At 10 percent growth per annum, that will increase rapidly, and the demand that this agreement will generate in China will be far greater than a simple 10 percent increase in trade over the course of a decade. I predict that within 5 years China will be New Zealand’s single largest market. Trade will be largely in agricultural products, but it will also be in services, tourism, and so forth.

I say to the Māori Party that Māori organisations understand that advantage. That is why they came to the Foreign Affairs, Defence and Trade Committee and were so enthusiastic about the agreement. They saw the potential to grow a market, and that is what the reduction of tariff barriers does. It does not just divert trade; it leads to total growth in international trade. If we want a comprehensive demonstration of that, we have only to look at the European Union. The establishment of no tariffs right across the European community did not just divert trade from, say, New Zealand to Britain; it hugely increased the economic potential of Europe, and Europe has gained immensely over the 50-odd years since the establishment of that free-trade agreement. This agreement will do the same for New Zealand and China, and for other countries that join in, as well. It will not just lead to trade diversion; it will lead to a massive and total increase in trade and prosperity. That is the gain of Part 1.

KEITH LOCKE (Green) : I think Wayne Mapp is using parallels that are not particularly appropriate here when he talks about the European Union, because the example of the European Union is of economies that are at a relatively similar stage of development.

Hon Member: What about Poland?

KEITH LOCKE: In fact, the other principle of the European Union—and there is a call about Poland—is that countries that were seen to be lagging behind a bit at its foundation, such as southern European countries, or Ireland in some respects, were given great assistance by the European Union to level up the whole situation. In that sense, whether we are talking about the European Union or about CER, where we have two comparable economies, the opening of trade and the removal of restrictions—and I am not saying each is perfect—we have a much more positive argument when we are talking about comparable economies. That is so particularly when they are neighbouring economies—in our case separated from Australia just by the Tasman Sea, and in the case of the European Union, adjacent geographically.

But it is quite different in the case of New Zealand and China, because the wages in China are hugely lower than the wages in New Zealand. Wayne Mapp mentioned business organisations here. I can mention one that submitted to the Foreign Affairs, Defence and Trade Committee—namely, Earth Sea Sky, a clothing manufacturer—which was very strongly against the free-trade agreement for that very reason. It is being driven out of business by the low wages in China, and it specifically talked about losing its skills base. The skills base is important for a country like New Zealand. The company said that things like the existing accumulated experience in cutting patterns, which is a very skilled trade, could disappear. The woman in Earth Sea Sky had her own experience of that. Her group is continuing more or less on the basis of her own experience, but with related experience as well.

That sort of hollowing out of New Zealand manufacturing is not in the long-term interests of the New Zealand economy. We want to have a more rounded economy. Wayne Mapp talked about agricultural exports. It may be that we will get some increase in agricultural exports as a result of this agreement, but at what cost to the rest of the economy? I think that is the point. It is just wrong to have this ideology of free trade where somehow everyone benefits, regardless of the state of each economy, the relative wage structures, the specialisations, etc. This is particularly the case with an economy as dominant as China’s. China not only has low wages but has heavy Government involvement to make sure it can smash any competition, including competition from New Zealand manufacturers, and force them either to go out of business or to move their manufacturing offshore. So the comparison Wayne Mapp has made is, I think, completely inappropriate.

JOHN HAYES (National—Wairarapa) : I have heard some nonsense talked in this Chamber, and that speech was a significant contribution in that sense. My colleague from the Green Party, Keith Locke, talked a load of nonsense.

But before I climb into that I would like to acknowledge the officials who are here today, particularly my ex-colleagues from the Ministry of Foreign Affairs and Trade, who are led by David Walker. I would also like to publicly thank Simon Murdoch for his leadership in this process. What has been really good about the process is that it has involved officials from across a whole range of Government departments. It is good to see our departments working together in the same way that we in this Chamber are working across political divides this afternoon. So I extend my congratulations there.

I was particularly interested in the freedom and latitude you gave the previous speaker, Madam Chairperson, because clearly he was not in any sense talking about Part 1. Part 1 talks about removing tariffs and amends the Tariff Act 1988. As I said in the House last night—obviously, our Green colleague did not hear me—there is no fairer trade than free trade. Mr Locke talked about one of the arguments brought to the Foreign Affairs, Defence and Trade Committee, and I can talk about a group called New Zealanders with a Conscience that gave us a four-page submission outlining their concerns that the Government would get less income because it was going to drop tariffs, and that the Inland Revenue Department would fall into deficit.

That is a particularly serious problem that our committee addressed, and the submitter argued that small businesses would close down as a result of these tariffs being reduced. On page 2 of its submission the group says that the agreement “would cause a great drain on the Government purse”. I really have to say that the select committee members, across all parties, disagreed that that would be the outcome. The point is that as a select committee we decided that this bill—which I think is the most significant piece of legislation to pass through this Parliament in the last 3 years—will contribute to making New Zealand an open and competitive economy, and will give us strong links to the rest of the world. China is showing other countries that it too is prepared to engage more strongly internationally by dropping its trade barriers.

Trade liberalisation policies go back at least 25 years in this country, and the moves that we made with the CER agreement 25 years ago have enabled our economy to be in the strong position it is in today to make these tariff adjustments without having a significant impact on companies that operate in our community. I think that the removal of most tariff and other trade barriers with China, as foreshadowed in Part 1, will improve resource allocation in New Zealand, contribute to economic growth, and also lower prices for consumers.

My Green colleague has gone, but the point about free trade is that no buyers pay more for a product than they want to, because if they are asked to pay more and they do not want to pay, then there is no transaction. That is a fundamental point not understood by New Zealand First, not understood by the Green Party, and not understood by the Māori Party, and it is really important that the community understands that point. For the same reason, the economic adjustment faced by industries will be small compared with those adjustments that would have been required when import licensing existed 30 or 40 years ago—when our economy was protected by high tariffs. I have been around many businesses in my community, and of the 20 or 30 people I have talked to only one person has said that bringing tariffs down and allowing cheap Chinese machinery imports is going to be a bit of a problem and have an impact on his business. I am thinking now of Rob Saxton in Greytown, the town where I live. He is the Stihl agent, and his products are quite highly priced, but they are of high quality. Consumers choose whether they go that way or go to Bunnings warehouse and spend $10 or $15 on an instrument that is perhaps less robust. This is what free trade is all about.

CHRIS AUCHINVOLE (National) : My colleague Wayne Mapp said yesterday: “Traders are waiting for us to do our legislative work so they can get ahead and reap the gains of the agreement.” That is very, very true, and it is with pleasure that I rise to speak on Part 1 of the New Zealand-China Free Trade Agreement Bill. Part 1 is the mechanism that reduces the barriers while at the same time providing safeguards.

The barriers to trade are very, very real when one does not have free trade. I reflect on what the previous speaker said: free trade is fair trade. Exporters do not have an easy task, but it is an honourable one and it is one that, like it or not, the rest of us live by. So what will be the effect of this free-trade agreement? The tariffs on 96 percent of New Zealand’s current exports to China will be eliminated by 2019. Two-thirds of all of New Zealand’s goods will be tariff free within 5 years. What a wonderful opportunity has been created, and I would like to add my compliments to the officials, to the Ministry of Foreign Affairs and Trade, and to everybody who has been working tremendously hard to achieve it.

There are many ways of penetrating a market. There are probably as many ways of penetrating a market as there are exporters involved in the trade. I reflect back on a career in the Dairy Board. With the difficulties associated with quotas, with the endless conflict, and with the challenges for access, it was amazing that we had the trade we did have—and what an effort it took!

The task of the free-trade agreement is to reduce and eradicate the unnecessary blockages. So how do those blockages occur, and why do we have to have the transitional aspects that occur in Part 1? The blockages generally occur through apprehension on the part of manufacturers and local producers. If we look at the Common Agricultural Policy—which was a huge blockage to progress, and everybody acknowledged it was not sensible—we see they occur from fears of privation, from fears of starvation, from the experience of war, and from the experience of countries being unable to feed their people. We go right back to the basic law of the provision of food, shelter, and clothing being a Government’s first responsibility to its people. So food has always been an incredibly sensitive, delicate issue, and tariffs were a way of giving protection. They have been used clumsily, though.

When I think back to trading in the Pacific, I know that the Pacific offers New Zealand exporters tremendous trading opportunity. We have markets that are operated under French—

The CHAIRPERSON (Hon Marian Hobbs): China?

CHRIS AUCHINVOLE: Well, indeed. But as a precursor to dealing with China, if one looks to see how trade is conducted within one’s own local theatre, one sees that there are many different ways. I can remember doing a chart of tariffs against particular dairy products—this, I am sure, will interest my colleague Doug Woolerton. The dairy product tariffs in, say, Tahiti used to run for line after line after line. They had been built up over an awfully long time, which meant that they were hard to reduce and hard to remove.

So we get to China—was it Napoleon who called it the sleeping dragon—and we look at its tariffs. We see China built a wall around itself—not just a wall of stone, but a wall of tariffs. Then New Zealand, through its negotiation and its approaches, started to penetrate that tariff wall, which is where we have come to today.

New Zealand has enjoyed free trade for a very long time. Having the benefit of grey hair and a bit of experience in life, I can go back—and I am sure Madam Chair will remember this—to the pre - free-trade times. The domestic life of New Zealand in the 1960s, when we were afflicted with tariffs, was one where we had very little choice of goods—very little choice of goods at all. In the 1970s people had plenty of money but there was a shortage of goods. There were import restrictions, tariffs, export restrictions, and all sorts of problems. Nowadays the logistics of exporting and importing are able to concentrate on the real elements of trading rather than the artificial ones.

Hon GEORGINA TE HEUHEU (National) : I am very pleased to take a call on the Committee stage of the New Zealand-China Free Trade Agreement Bill. I have heard the snipes coming across the floor from New Zealand First—my colleague Wayne Mapp referred to them earlier—and from Winston Peters who, when this deal was originally signed, said that it is not good enough and we need more, and I am absolutely waiting for New Zealand First members to take a call and to hear what their objections are all about.

This free-trade agreement has been negotiated with the overriding objective of opening up economic opportunities for New Zealand business in China. A growing part of New Zealand business is Māori business. As my colleague Dr Mapp also mentioned, representatives from Māori business came to the Foreign Affairs, Defence and Trade Committee and went through what they saw as the huge advantages for Māori business.

I want to paint just a little bit of the context. This agreement is historic. It represents a challenge and a huge opportunity for Māori. In the current environment, where over the last 10 or 15 years we have seen the quite substantial return of significant fish, forestry, land, and other assets to Māori tribes—and that will continue over the next 10 years—this agreement is a major marker for what will happen going forward. Part 1 of the bill deals with the removal of tariffs. That could not be timelier for Māori business potential as we go forward.

I think we are all, particularly in this House and in the private sector, pretty much aware now of the growing asset base of Māori. It is estimated to be anywhere between $9 billion and $15 billion and it is growing—it is huge. We also know that its future is dependent on export—exporting goods to China and to the world. We all talk globally now, and free trade is what goes with a global economy. Free trade is absolutely critical, and the removal of tariffs and other trade barriers is the core of the free-trade initiative that has started with this and will no doubt grow.

According to Hui Taumata 2005, Māori enterprises are concentrated in export-oriented areas, primary production, and processing, and about 60 percent of Māori commercial assets are reliant on international trade. This is significant. It is significant because 96 percent of Chinese tariffs and trade barriers will be removed by 2019. That is a huge achievement. That is not far away; it is just around the corner. An example of where Māori interests will benefit is in the fisheries industry, with the removal of tariffs imposed by China on products such as live lobster and pāua, which are currently around 25 to 35 percent. We do not really have to think very far forward to see the immediate impact that this removal will have on Māori business and Māori exporters, and certainly for the long term as tribes get their assets and organise their governance arrangements.

There is a big challenge, of course. Treaty settlements were one part of this equation and we all thought that was hard; actually the harder part is coming now. We are on to the harder part now: nurturing those assets, growing them, creating wealth, and making sure we have access to world markets. The market in China is the biggest one could want to be in—the absolute biggest. Māori exporters are already going up into China; they have been for at least the last 5 years in a small way, but that is growing. As I say, there is no doubt whatsoever that free trade is the hallmark for growing Māori potential in the business and export sector going forward.

SUE MORONEY (Junior Whip—Labour) : I move, That the question be now put.

The CHAIRPERSON (Hon Marian Hobbs): I think I will grant one more call, and that is to Tim Groser. I take notes as we go through. I have listened to the arguments, and they have become fairly repetitive and rather wide on the question of tariffs.

TIM GROSER (National) : Madam Chair, first of all, let me give you my personal assurance that I have taken note of your harsh, but possibly just, ruling. I shall make carefully targeted points about Part 1, which after all is—to use plain language—the meat and potatoes of the agreement.

The preferential rates are very important, and I will illustrate the underlying point about this in a couple of different ways. First of all, we take Dr Mapp’s earlier point about the competitive edge and we look at it in terms of one example that comes to mind, which is wine. I stand to be corrected, but from memory the most favoured nation rate on wine imported in bottles into China is 14 percent. For a country that enjoys, as we do, the privilege of having the highest per-bottle price in the world—believe it or not—on the largest wine market, which is the London market, having this competitive edge will be of considerable benefit. There is absolutely no truth in the belief that the countries in Asia that are seeing the emergence of the middle class will not move into consumption of these products, and I think New Zealand wine exporters will benefit enormously from this competitive advantage. That is the first basic point that I make about the tariff reductions.

The second point is that I want to address some criticisms about the allegedly slow pace. First of all, I do not consider it slow at all by the standards of most trade agreements, particularly coming on top of the major liberalisation that China itself has undertaken in the context of its accession—or readmission, according to the official script—to the international trading system. I use the term “roughly a decade” to describe the overall totality of a complex tiered formula that has been negotiated on tariffs. I do not consider it a long period of time at all, particularly when we look at the profiling of our major exports in relationship to that timetable.

The other point I would make is about the automaticity of this process. In Part 2 we will come to the question of safeguard measures and contingency protection devices, which qualifies us a little bit, but I do not believe in any important way. When we come to look at the automaticity of this process, this is a very, very important qualifier to any criticisms about the slow pace. What is quite clear—and we have seen this in a variety of different trade agreements; I saw it 20 years earlier in respect of the Australia and New Zealand Closer Economic Relations Trade Agreement—is that when businesses know what the end point is, they can get ahead of that end point and accelerate the process. We had literally within weeks a spectacular example of that in the signing of the deal by Fonterra, our largest goods exporter, worth some $300 million over a period of time. Fonterra took advantage of tariff reductions that literally had not even come into legal effect, for the very simple reason that we are here today in this Committee enabling the legislation to go through to have that effect.

So already we have seen that this is not theory; this is how the market works. If we put in place what looks to some a modest pace, finally—within reason—it does not matter. The automaticity of the process is what matters. Then people can get ahead of the programme, as we have already seen.

The second point is in relation to tariff reductions, when we measure them with these econometric exercises. I have been involved in many of these exercises. Although they are highly sophisticated in terms of their methodology, personally I do not think they are particularly useful. They omit what in earlier times were called x-efficiency gains by economists—or the dynamic effects, in more plain language—and almost always seem to me to understate the importance of the tariff liberalisation process. The mere reduction of tariffs is one part of it, but the stimulatory effect in terms of actual company business also matters.

My own view is that this will have what is called demonstration effects, which has been much commented on internationally in the literature around trade agreements, and which will be particularly strong in this agreement. The reason I believe this is to do with the Confucian nature of the society we have negotiated this agreement with. When China designates New Zealand as a preferred tourist destination—I imagine that if the Australian Government did that, we would all fall around the floor laughing, along with our Australian cousins—I believe the signal to Chinese businesses will be considerable.

Dr WAYNE MAPP (National—North Shore) : I raise a point of order, Madam Chairperson. I have sought this point of order because you indicated earlier that there would be only one more substantive call. I am aware of the rule that states that once you accept a closure motion, that is it and it cannot be contested, so it is important that I raise the point of order now.

I raise it in two parts. The first part relates to the general significance of this legislation. It is widely acknowledged and recognised, including by the Government, that this is the most significant economic legislation to be passed, certainly this year and realistically in this term, by this Government. I believe therefore that a proper level of debate is required. Part 1, as we all concede, is the core of this agreement. To have a debate that is not even an hour long is, frankly, not appropriate. The second point is that all of the discussions so far, by all of the speakers, have actually been on Subpart 1, “Implementation of preferential tariffs under New Zealand-China Free Trade Agreement”. There has been no discussion as yet on Subpart 2, which actually covers six clauses in relation to safeguard measures—virtually no discussion on it whatsoever. The reason for that, of course, is your strict ruling earlier, and we understand why you made that ruling in terms of the Standing Orders. We felt that we should therefore deal explicitly with tariffs in Subpart 1, and then we would move on to deal explicitly with the issues addressed in Subpart 2. To accept a closure motion now would effectively deny members the ability to have any debate whatsoever on Subpart 2 of this very, very important legislation.

MARTIN GALLAGHER (Labour—Hamilton West) : It seems to me, with due respect, that the Committee did have the choice of having a very wide-ranging, comprehensive debate in which multiple calls could have been taken. Leave was sought for that and leave was denied. Consequently, I understand you then had to go back to the Standing Orders and that you were bound by the Standing Orders, leave having been denied.

The CHAIRPERSON (Hon Marian Hobbs): This is a question of debate. At the moment we have had, with all due respect, a series of very good lectures, but it has not been a debate. The debate has not been joined in the Committee. There was time to go on to Subpart 2, but speakers chose to stay on Subpart 1 and to mention only casually Subpart 2. Very many important laws have gone through this Parliament almost without there having been a Committee stage on them. I therefore will not give members further calls on this part.

JOHN HAYES (National—Wairarapa) : I raise a point of order, Madam Chairperson.

The CHAIRPERSON (Hon Marian Hobbs): I hope the member is not going to challenge the point of order.

JOHN HAYES: I draw your attention to Standing Order 109, the gist of which is that the House is not to anticipate discussion. With the greatest of respect, Madam Chairperson, I point out that you were not at the select committee and a party to the debates, and neither was the Minister in the chair, the Hon Nanaia Mahuta. There is quite a number of elements to the Tariff Act that are yet to be discussed. I am ready to discuss them, and I wish to have the opportunity to do so.

The CHAIRPERSON (Hon Marian Hobbs): I am sorry but the member had the opportunity to discuss both Subpart 1 and Subpart 2.

MARTIN GALLAGHER (Labour—Hamilton West) : I move, That the question be now put.

TIM GROSER (National) : I want to address the issue in Part 2 of import certificates of origin, and to give a view about the ultimate purpose of this issue. In doing so, I might say I apologise to you, Madam Chair, if this appears to be another lecture, but when one has a situation where the Opposition is actually supporting the Government, it is very difficult. One might want a vicious disputation, but that is not going to happen in the passage of this bill.

A couple of points are very important to the question of certification. The first relates to the rules of origin and the other relates to the use of the devices of contingency protection—in particular, anti-dumping and safeguard actions. Without certificates of origin these mechanisms simply cannot operate.

In respect of rules of origin there has been a lot of criticism of the free-trade agreement strategy centred on the metaphor of the spaghetti bowl. This criticism essentially says that the proliferation of free-trade agreements is creating impossible administrative obstacles for traders. It is an argument made against free-trade agreements of this type. Personally, I have for years believed this to be grossly overstated. I do not think that New Zealand exporters will now be confused in their trading relationships with China, as a consequence of the rules of origin that will prevail. In many cases this illustrates a lack of understanding about how administratively, in practice, rules of origin are actually handled. I do not think this is as fundamental a problem as the critics would have it. We can establish ex post facto, through certificates of origin that are provided for in Part 2, what are truly Chinese goods in the case of imports into our customs territory or truly New Zealand goods in terms of the substantive provisions relating to rules of origin.

The second point, which I think is probably more real from the point of view of domestic concerns about this trade agreement, relates to anti-dumping measures. Certificates of origin are crucial to safeguard all devices of contingency protection. If there is agreement to apply measures, or in some cases not to apply measures, to goods of one’s free-trade partner, then one needs certificates of origin to establish what the goods are. In the course of the submissions we were told—and it was an echo of the debate one hears internationally—that this agreement will not work because of the provisions relating to unfair trade. It is very important, I think, to define the concept of fair and unfair trade in traditional terms. In this 5-minute call on Part 2, I will not get involved in a broader discussion of the swampland territory we would get into if we expanded beyond the traditional definitions, but I will focus on anti-dumping.

Certainly, it is fair that our companies need protection from dumped imports. We have a longstanding procedure in this country to deal with this, and I just want to address the criticism that the free-trade agreement will not work. That criticism is entirely misplaced, and in the course of this inquiry we asked for some very simple, but very powerful, analysis to be produced on the application of anti-dumping orders to goods of Chinese origin, not just in our customs territory but around the world, since China joined the World Trade Organization in 1995.

Far from substantiating the critique: “Nobody can apply anti-dumping orders to China.”, we found that 27 countries—a mix of developed and developing countries, including our own—have applied anti-dumping orders, or anti-dumping measures, to goods of Chinese origin, and in each case they would have been required to apply certificates of origin of the type provided for in Part 2 of this bill. Even more important, in only one case did the Chinese authorities choose to contest this, and, as at the time of drafting the select committee report back, that was still in the process of going through the World Trade Organization dispute settlement procedures, which, as members would be aware, are highly complex. In other words, all but one of these 327 measures have been applied successfully. I think we should have every confidence in the provisions.

CHRIS AUCHINVOLE (National) : The legislation that kicks open the door to the future does not, in itself, furnish the room beyond. When I looked at Part 2, I thought that this is a very good safeguard measure that has been introduced. Certificates of origin, perhaps seen just as a bureaucratic part of an export job, are far more than that.

I remember having a discussion on certificates of origin and the need for them, particularly on generic products like consumable butter and that sort of thing. We were designing a new wrap for New Zealand butter and it had to comply with certificates of origin; the French customer in this particular case required the word “beurre” on it. The question from the product division was why butter is butter, and we responded: “When did you last buy a wrapped product without English on it?”. We like to see, we like to know, what we are purchasing and, increasingly, we like to know where it is from. That is very, very important from a consumer’s point of view.

Keith Locke: That’s right.

CHRIS AUCHINVOLE: I know that parliamentary colleagues in the Green Party are making a particular thing of this.

My colleague Wayne Mapp mentioned stickers. Well, there are stickers on apples. I do not know how one shows a certificate of origin on an egg, although I have seen stamps on eggs; it can be done. But a certificate of origin is far more than just a stamp of origin. It carries the essence of the country of production with it. In the case of New Zealand, it is a brand in itself, if one has a certificate of origin. It is a protection for the producer, it is a protection for the consumer of the goods, and it is a protection for the carriers who transact the export of those goods.

In reading Part 2, which amends the Customs and Excise Act 1996, and having been involved in export for a while, I wondered why we had to have a particular certificate of origin. The answer, I guess, is in new section 64A(3), to be inserted by clause 14. It specifies: “Goods originate in New Zealand if, for the purposes of the China FTA, the goods satisfy the requirements of the rules of origin prescribed for the China FTA.” If I have it wrong, I would be grateful if the Minister would take a call, and explain. I gather there are particular requirements that the certificate of origin meets.

My colleague Tim Groser, who has phenomenal experience of this issue, talked about anti-dumping protection. I would agree with him that rather than go into the swampland of discussing that in detail, I think there is a case for accepting that there is a measure of protection through the certificate of origin purpose. I think what we are seeing here is a further example of free trade being free but also being protected in the best sense, because exporting and importing is not just a matter of transacting.

I used to explain to the troops, as we called them as we went about our work, that what the customer wants is not really lots of advertising and negotiation on price. What the customer—the end distributor—wants is the goods he ordered on the vessel he nominated at the agreed price, but overall, more than anything else, he wants the correct certification, because it is, in fact, the documents that are being exchanged. The goods follow along in good faith, as does the money, but the documents form the crucial part of any transaction of an export nature. We are blessed in this country with a Customs Service that has obligations to the country and to the international linkage with other customs services—which, of course, sometimes comes as a surprise to exporters.

KEITH LOCKE (Green) : I am glad that Chris Auchinvole has talked about the importance of knowing the origin of products and that we have had all this talk about certificates of origin. That is very good, but it seems to me that certificates of origin are only the first step. Sure, it enables the country of China to find out that the goods are coming from New Zealand and to get that legitimation and vice versa—and hopefully we will get certificates that these goods are genuinely coming from China—but that is for the bureaucrats. The bureaucrats will know that, but what about the people? This Government, supported by the National Party, has refused to adopt the Australian procedure of having compulsory labelling of the country of origin on food products. It absolutely refuses to go along with that and, surely, that is in contradiction to everything that the National Party speaker has just said.

Sue Kedgley had a member’s bill, which was supported by the Māori Party and New Zealand First, to enable us to be in tandem with Australia. It would have offered consumers—in this case, Australian and New Zealand consumers—the choice between particular products based on their country of origin and also the choice to have the right to do so. When we raised those issues in Parliament we got lectures from Annette King and Phil Goff, who said that it was only a question of food safety. They said that the Government guarantees food safety, that anything coming from China or anywhere else is guaranteed to be safe, and that that was all we needed to know. We said that consumers have a right to know and to make a choice on whatever basis they liked. Consumers might not like the human rights situation in the Sudan or Zimbabwe, and they might make a choice on that basis if they wanted to.

So even though the National Party talks about freedom and all the rest of it, it will not allow the citizens of New Zealand the freedom to choose on any basis they want whether they accept the product in terms of its country of origin. It is a basic democratic right.

Chinese garlic is already coming in and selling at a few cents a bunch, and it is completely undermining the New Zealand domestic product. Most consumers, when buying that garlic, do not know it comes from China and they do not know about the conditions it is produced in. They do not know which toxic materials may be associated with it. They know nothing about that because it is not labelled, and they should have the right to have it labelled.

Why should we be against the Australian position—the democratic position in Australia—on this question? It just shows that this free-trade agreement is not about helping the New Zealand people to make proper choices or anything else.

John Hayes: I raise a point of order, Madam Chairperson. The debate we are hearing at the moment has nothing to do with Part 2.

KEITH LOCKE: Speaking to the point of order, Madam Chairperson, this part is all about this issue. Chris Auchinvole went on in his speech about certificates from the country of origin. My debate is that this should be extended and complemented by having consumers know that fact as well as the bureaucrats.

The CHAIRPERSON (Hon Marian Hobbs): I actually heard, and said to the Clerk beside me, that the member was taking the debate wider than the certificate of origin as it applies to this free-trade agreement, but he had begun with Part 2. I now ask the member to come back more closely to Part 2.

KEITH LOCKE: I will accept your judgment, Madam Chairperson. But members should recognise that in the Green Party’s view, one cannot separate the question of certificates of origin that are provided to the State machinery in another country from that of the certificates of origin—that is, stickers on the food or on the basket of food—that are available to the New Zealand people.

We could, if we wished, move an amendment to the effect that these certificates of origin be complemented with a requirement for them to be made available to the people of China perhaps, or be made available on Chinese goods being bought by the people of New Zealand, through having just that additional bit. I am sure the amendment would be supported by the Māori Party and New Zealand First. It does not need to be the whole certificate, but just a little label, stating perhaps the abbreviation COI—that is, certificate of origin—and the word “China”. It is not a very long word to put on a label: C-h-i-n-a. That could be done so that the procedure does not stop at the level of the State bureaucracy. I think that possibly over the dinner break we might be able to work out a little amendment to that effect, although it may be too difficult in that short time.

Dr WAYNE MAPP (National—North Shore) : I was going to talk specifically about Part 2 and about the purpose of Part 2, which, I might add, is an imposition on the New Zealand manufacturer. This is a change to New Zealand law, actually, not to Chinese law, and it is worth remembering that point. It is worth thinking about the origin of certificates of origin. That point has been addressed significantly by Tim Groser and Mr Chris Auchinvole, and addressed tangentially, I guess, by Mr Keith Locke.

The whole point of a free-trade agreement is that it regulates trade between two particular countries. That is axiomatic, obviously. But we have to know whether the products came from those two countries, and to know that the countries do not act as trans-shipment points for products from other countries that would then seek to take advantage of the free-trade agreement and to have a covert free-trade agreement using the good offices—or, indeed, the bad offices—of one or other of the countries. Certificates of origin are about authenticating that goods have come from one country and are going to another country.

Historically under the GATT and the World Trade Organization, this has been measured by way of percentage. Goods have had to have a minimum of 60 percent, which was subsequently changed traditionally to 50 percent and then 40 percent as manufacturing became increasingly globalised. Most manufactured goods, for instance, would consist of products from literally all over the world, and the original view of 60 percent simply was unsustainable. Many goods would have a much greater percentage of overseas inputs, so the percentage went down. That is not the contemporary way, because, as globalisation has further developed, what is being looked at now is not so much percentages—which are increasingly hard to measure anyway; they would impose huge compliance costs on the manufacturers in New Zealand and would in many respects negate the advantages of having a free-trade agreement—but the transformation of the goods, the process that occurs in the manufacturing of the goods.

The question is whether a process has occurred through the New Zealand manufacturing that would, therefore, entitle the goods to have a new origin. It is not about percentages but about whether a manufacturing process has taken place. The same rule now exists in CER, and I recall that that was not the case originally. So free-trade agreements have had to evolve as we have had much more global trade.

A huge number of elaborately transformed goods, as the term used to be known, consist of goods from literally all over the world, and measuring percentages is extraordinarily difficult. That is particularly true of a country like New Zealand. By definition, we do not have a comprehensive manufacturing base, where all inputs could be sourced in New Zealand and there could be a high degree of reliability that we would reach the 60 percent or 50 percent of whatever is being made. But we can easily identify whether a process has occurred in New Zealand. That is easy to measure and easy to police for both the New Zealand authorities and, for that matter, the Chinese authorities.

Looking at it from the other perspective, of New Zealand’s importing goods from China, there are the same rules. It does not really matter so much, because China has a comprehensive industrial structure where basically all the inputs will be manufactured in China, and there is a high degree of reliability that the goods exported from China to New Zealand will be Chinese. That is not the case with New Zealand.

Of course, members will note I am talking primarily about industrial goods. Agricultural goods, by definition, are different. It is relatively easy to determine whether goods are sourced in one country. Even though the labelling may not have to be in the store, from a customs point of view, it has to be demonstrated that the goods were sourced from one country or another. If we take the situation of agricultural exports from New Zealand to China, we still have to be able to demonstrate that the goods actually originated from New Zealand.

JOHN HAYES (National—Wairarapa) : I will speak in the context of Part 2, and follow my colleague Dr Mapp and the assertions he was making. I thought it might be interesting to consider Part 2, where we are amending the Customs and Excise Act 1996 in the context of agricultural produce. For example, when I was ambassador in Iran one could find kiwifruit, but they were of a particular size and shape that was not quite the same as kiwifruit that originated in New Zealand. One could find wool being passed off as New Zealand wool, and Chinese meat in the Iranian market being passed off as New Zealand lamb. The point about the certificates of origin is that they guarantee to the importing country the source of the goods—that the goods had originated there. So in following this process through, in these amendments to the Customs and Excise Act foreshadowed in Part 2, we are protecting the interests of New Zealand agricultural exporters.

It is easy to produce a pound of butter and put a wrapper around it asserting that it is made in some other country. I do not particularly want to finger countries, but I promise members that it happens. Other documentation is required, also, as part of this process—for example, halal certificates certifying that meat shipments are of animals killed in the appropriate Islamic fashion. We are giving the importing country—in this case, China—a level of satisfaction that the products entering their market under the certification of the New Zealand authorities are what they say they are. In the same way, there will be a similar process at the other end of this telescope, in China, where the Chinese system will be working to give us exactly the same guarantees and certificates, so that we can have satisfaction in this market that we are getting products from China.

In this general context of Part 2, at the select committee we got a submission on this bill from the Christian World Service expressing concern. The Christian World Service felt that poor countries always start on the back foot in trade negotiations, which were, it said, carefully controlled by the richest countries to further their own interests. Well, whether a country is rich or poor, I think every country works to advance its own interests, and we are doing that in the context of Part 2 and the rules we are implementing, which will enable those guarantees to be given. The Christian World Service felt that the communities it was working with—for example, in the Philippines and Mexico, which are increasing agricultural production to feed their people—had seen large-scale migration off the land. But that has nothing to do with the issues we have had to consider under Part 2. It seems to me that we are actually helping other developing countries, particularly those around the Chinese border—for example, Cambodia and Thailand—so that when products get exported to us from China we know that they have come from China and have not slid in under a barrier from another country that might have lower costs of production than those found in China.

Hon Member: Is that possible?

JOHN HAYES: Yes, that is absolutely possible, and I have seen it. I think the other parts of Part 2 are relevant—for example, new section 64B, inserted by clause 14, where we are establishing “Bodies authorised to issue New Zealand certificates of origin”. This is fundamentally important, because we need to guarantee to the buyers in other countries that proper process has been followed, and that New Zealand as a reliable trading partner needs to have these certification systems in place in a way that gives confidence to our overseas buyers. I think we fully support those arrangements.

I will come back to the point that our Green colleague was discussing, in terms of threats to products like garlic, which I think he was talking about. What is really important is that as we move forward with our trade, and advance arrangements with the Chinese community, increasingly we will have to put into our agricultural processes the systems that can identify the suppliers of products.

Hon GEORGINA TE HEUHEU (National) : I follow my colleagues in speaking on Part 2, which makes amendments to the Customs and Excise Act 1996. Under clause 13, the part provides “for a system of issuing New Zealand certificates of origin in relation to goods being exported to China under the Free Trade Agreement between the Government of New Zealand and the … People’s Republic of China”.

This is a very important part, and I take issue with the Green member who said it was just all about what bureaucrats did. I do not think I am misrepresenting him—at least, I hope not—but I took that to be what he was saying, and then he said that these provisions were really of no importance. But we have Minister Mahuta in the chair and she, as much as anybody, knows the importance of the mark of a product, the essence of a product. Of course, Māori have something similar in terms of our cultural products with the Toi Iho mark, which gives a guarantee of quality, of high craftsmanship, and also of some of the wairua that has gone into those products carrying that mark.

Immediately it is easy to see why this part is so important. I would be interested in the Minister taking a call just to confirm and reaffirm how important this part is, and that it is certainly not just about bureaucrats and what they have to do; it is about a guarantee of quality. In that sense it is a protection for the product, it is a huge protection for the consumer—the buyer—and it is a protection for those whose transactions send goods by way of export between the countries involved. As I say, it is somewhat like Toi Iho.

Yes, this is about free trade. It is about boosting our ability to trade with other countries around the globe and to remove barriers that inhibit free trade. But it is not about open slather, either, and we owe it to New Zealanders in the first place, and to all those who will be buyers and consumers in China, that there is a brand attached to our products that gives all those people an assurance of the quality and of the essence of those products.

• Sitting suspended from 6 p.m. to 7.30 p.m.

The CHAIRPERSON (Hon Marian Hobbs): We are debating Part 2 of the New Zealand-China Free Trade Agreement Bill. By agreement of the Committee we are considering this bill part by part, which has necessitated a narrow debate on each part. The option was offered to the Committee of having a wide-ranging debate; that leave was refused, so we are applying the rules of debate quite strictly. There have been six speakers on Part 2, and the final speaker was the Hon Georgina te Heuheu, who has 43 seconds remaining. She is not here, so are there any other speakers to Part 2? There are not.

The CHAIRPERSON (Hon Marian Hobbs): This debate includes the Minister Hon Phil Goff’s amendments set out on Supplementary Order Paper 215.

TIM GROSER (National) : I will take a brief call on Part 3, “Amendments to Radiocommunications Act 1989”. According to my understanding, the purpose of Part 3 is identical, in a sense, to Part 5, “Amendments to Electricity Act 1992”, in that they are the two principal Acts affected by the mutual recognition agreement covering electrical and electronic equipment. I will make brief comments about some aspects of the agreement in relation to Part 3, and when we debate Part 5 I may take another call to look at some other aspects.

This is a highly technical subject, and we should be aware that this debate is linked to deep concern, not just in New Zealand but right throughout the world, about the relationship between standards and international trade agreements. Some people popularly refer to such agreements—deeply misleadingly so—as a “race to the bottom”. The opponents’ view, which is a complete misreading of what this agreement is about, is that by entering via the globalisation framework into trade agreements of this type, countries like New Zealand or the United States are in some way agreeing to lower their standards to those of other countries—in this case a very large, developing country—and that that is “appalling”. That is actually a completely wrong interpretation of what this agreement is about.

In terms of both the mutual recognition agreement and the broader context of the World Trade Organization and other trade agreements, there is nothing to stop New Zealand adopting the standards it wishes to adopt in relation to consumer safety. There is no race to the bottom. There is no reason for New Zealand consumers to be even slightly concerned that this trade agreement will in some way mean a lowering of safety standards on electrical and electronic equipment—far from it. As far as I am aware—obviously I lack technical expertise in this area—we have standards equal to anywhere in the world to protect New Zealanders from poor wiring. We all know we are talking about something that is—potentially—literally lethal. I assume—because I am not aware of a large political debate in this country over this issue—that we have quite adequate safety inspection systems in place. I know that we have issues relating to poor wiring in terms of electrical fires, but I am not aware, for example, of children routinely being electrocuted while opening the fridge, which is, fundamentally, what this issue is about. When we debate Part 5 I will make some other comments about the whole concept of mutual recognition, because it is a very interesting feature of the agreement. I have to say I am surprised, in the pleasant sense of the word, that we have come to an agreement, given some of my own experiences in negotiating mutual recognition agreements. It is quite a credit to the negotiators that this agreement is in place.

The remaining point I want to make relates to the competitive edge that this agreement gives to New Zealand in terms of the recognitions relating to the conformity assessment processes. As I understand the agreement, this will be a first for China. Of course, in that sense the whole agreement is a first for China—not in terms of all countries but in terms of developed countries. It is not quite correct to say that China has no other free-trade agreements, but this is certainly the first in respect of a developed country. The agreement relating to Part 3, “Amendment to Radiocommunications Act 1989” is indeed a path-breaking effort by China in its first attempt to do this with a small but sophisticated country. We should be very pleased that this agreement is being taken forward.

Dr WAYNE MAPP (National—North Shore) : I will just develop the point that was being made by my colleague Mr Tim Groser, who of course brings an enormous level of experience to international trade negotiations. One issue that has come through in amendments to Part 3 has arisen because there was some fear by submitters that through this agreement we would essentially be allowing the importation of dangerous electrical goods from China into New Zealand. It seemed to me at the time that those people were misunderstanding the role of international trade.

I ask the Committee—and I put this to submitters—how successful China would be if it established a reputation as an exporter of dangerous electrical goods to other countries. It is in China’s interests to demonstrate that it is an exporter of high-quality goods, and, by and large, it has been successful in that. We have only to go to any electrical goods store in New Zealand to find a wide range of Chinese-manufactured electrical goods, such as television sets, radios, DVD players, and so forth. In fact, China is already one of the world’s largest—if not the largest—manufacturer of television sets. Those sets are mostly not for local consumption; they are mostly for export. A significant number of Apple iPods are manufactured and assembled in China. The truth is that global companies are increasingly using China as a manufacturing base. Quite clearly, high electrical standards are required.

In this instance we are talking about a global trading nation that produces goods of a standard that is safe for New Zealand. I am not suggesting there have been no problems at all—in particular, there have been problems in relation to lead paint in toys. But those things are still covered by our safety regulations. Just because we have a free-trade agreement, that does not mean we will completely abandon all standards around phytosanitary rules, product safety rules, and so forth. Countries still have to comply with those rules, but this is a particular recognition in relation to electrical goods.

I know that my colleague Mr Groser very, very carefully discussed the nature of the agreement with members of the Government and former colleagues within the ministry. He made a formal recommendation well before the agreement was signed that that part of the agreement was satisfactory for the protection of the consumers of New Zealand. So what we are doing here today is passing that mutual recognition into legislation. I am suggesting, and, indeed, saying, to New Zealanders and to members of the Committee—particularly to those parties that are opposed—that this is not a reason to vote against the agreement. To be fair, I have not actually heard New Zealand First oppose the agreement on this particular point. It has opposed the agreement on other points but not on this point. The Greens have raised the issue from time to time, and Mr Locke raised it in Foreign Affairs, Defence and Trade Committee. I will certainly be anticipating their future contributions.

It is a curious thing that this debate has been going for approximately 2 hours and virtually all the contributions have been made by National members. We think that this is an important agreement. We understand that there will be a third reading tomorrow, and we wish to facilitate that process—we want this agreement to pass into law. But I must say I am surprised that parties that are opposed to the agreement have not been taking calls. Surely the people’s Chamber is where parties might actually set out their arguments as to why the agreement is not beneficial for New Zealand. I have to ask those three parties whether they are a little bit embarrassed about not supporting this agreement. It is widely supported.

Peter Brown: Will the member get back to the part?

Dr WAYNE MAPP: It is rightly supported, and I say to Mr Brown that this is not one of those parts of the agreement that he need be concerned about. There is safety for New Zealand consumers based on this acceptance of the standards.

The CHAIRPERSON (Hon Marian Hobbs): Just before John Hayes takes the floor, I wonder whether we could really concentrate on what Part 3 actually says. I ask the speakers to read the part. It is actually about New Zealand conformance, not Chinese conformance.

JOHN HAYES (National—Wairarapa) : Thank you very much Madam Chair, but I would draw to your attention that there is a mirror-image process going on in the Chinese system so that the two sides of the telescope actually connect in the middle. It is, of course, a minor point. I will address the question that you put to the Chamber, which is the question of Part 3. I would particularly like my colleagues in the New Zealand First Party, the Māori Party, and the Green Party who oppose this bill to look at this document: New Zealand - China Free Trade Agreement (And Associated Instruments): National Interest Analysis. I doubt that anyone in this House, with the exception of those on the select committee, will have taken the time to go through that document and to work out what it is talking about. I would particularly like to draw Mr Brown’s attention to page 15 and paragraph 3.1.4 of that document, which talks about the need to make sure that our technical regulations in New Zealand—that is, that the electricity supply will be 240 volts and so many cycles, and have so much insulation—do not constitute a significant barrier to trade in a similar way to tariffs.

Without formal arrangements it is difficult to engage with other countries at that technical level, which is why this bill includes Part 3. What we are trying to say here is that our technical experts in China and in New Zealand need to have a mechanism for meeting together to discuss issues between them. In my electorate, where people have recently invented a machine for monitoring milk production through the use of electronic eartags so that, for example, one can predict mastitis before it becomes a clinical problem, one needs to get people on both sides of this trade agreement having common rules and understanding that this equipment satisfies rules in China. If the Chinese people feel they do not, then one needs a mechanism for dealing with the debate. Because of that we have to make amendments, as required here in Part 3, to the Electricity Act 1992 and the Radiocommunications Act 1989.

This is the Radiocommunications Act part of the arrangement, and it is to create regulation making powers to enable legal action to be taken against people who do not fulfil the requirements of international obligations while purporting to do so, and to provide for the seizure, sealing, or impounding of products in cases of non-compliance with the requirement of the two Acts, including in relation to the Environmental Risk Management Authority. This is done in part by Order in Council, and also by the Radiocommunications Act 1989. It will enable legal action to be taken against people who break the rules. That is the function of this legislation that we are debating now. It is in the New Zealand communities’ interests to do this. [Interruption] I realise that Mr Brown does not have any constituents, at least in an electorate sense, but I can assure him that if he was an electorate MP like me, and if he talked to people and represented their views, he would know that Part 3 is a significant benefit to them. I urge New Zealand First members to really think about what they are doing here and to support this element of the bill even if they do not support the whole concept. Opposing this is actually working against the interests of every New Zealander. That is why, I say to Mr Brown, 80,000 people have left the country in the last 12 months—45,000 of them to Australia.

The CHAIRPERSON (Hon Marian Hobbs): Back to the bill, please.

JOHN HAYES: It is because we have poor government. That is why, in Part 3, we are acting to make sure that our community has good rules and that the community will feel good about living under them. People feel threatened by this legislation we are passing, but I say to them that there is no need for that. If those who opposed the bill had actually read this national interest analysis, they would see that there is absolutely no way one could oppose Part 3.

• The question was put that the amendments set out on Supplementary Order Paper 215 in the name of the Hon Phil Goff to Part 3 be agreed to.

CHRIS TREMAIN (National—Napier) : I rise to take a brief call on Part 4, “Amendments to Fair Trading Act 1986”. I particularly want to discuss two clauses in this part: clause 21, which deals with the purpose of this part, and clause 23, which deals with a new section to be inserted. Members may wonder why I am taking a call on this particular part, given that it concerns quite a tight piece of the Act. Part 4 deals with cooperation in the field of conformity assessment in relation to electrical and electronic equipment and components.

Once again, members may wonder why I am taking a call on that particular part. It so happens that I have two companies in my electorate—two somewhat successful businesses. One goes by the name of Vectek Electronics and the other goes by the name of Future Products Group Ltd. Both these companies are involved in the manufacture and export of electronic products. Both companies will be involved in manufacturing and exporting these products to China, and both will be affected by those particular clauses in terms of ensuring that they conform with the requirements relating to electrical and electronic equipment.

I will start with Vectek Electronics, which is an amazing business—a phoenix out of the ashes of PDL Electronics from Napier. PDL Electronics was led by a gentleman by the name of Keith Valentine, who has been quite a visionary in Napier and in New Zealand circles in terms of electronics manufacturing. He is an amazing gentleman who started the company pretty much from nothing. It is now a business that makes over $20 million from the export of electronic products throughout the globe—to America, to Korea, to Japan, and to China.

It is interesting that one might not think this business would be able to compete in those markets, but it produces power smoothing equipment in the electronics area. Power smoothing is used in factories in Korea and China that produce superconductors and microchips. Those factories require specific power smoothing because, as members may be aware, there is an abundance of power in China and that power is highly volatile. It requires significant smoothing to ensure that the power delivered into the factories is smooth and that the equipment used to manufacture microchips does not fall over all the time.

Vectek Electronics is an amazing business that will be affected by Part 4, particularly clauses 21 and 23. It will have to make sure that the power smoothers it manufactures in Napier and exports to China conform to these standards and make the grade. I believe that, as a result of the free-trade agreement, Vectek Electronics will be in a much stronger position to grow exports from New Zealand and to grow wealth, jobs, and income in Napier. It is an amazing business.

The second business is called Future Products Group Ltd. It was started in 1992 by a gentleman by the name of Rob Darroch. It started with two carpenters who were producing supermarket checkouts. This company is now an amazing business that has grown significantly. It currently has exports of around $25 to $30 million, and it has a vision of achieving exports to the value of $50 million over the next 5 years. It started with supermarket checkouts, but it has now moved into refrigeration units and the electronic equipment behind refrigeration units. It has done a lot of the McDonald’s supermarket franchises. In fact, it is now one of the four McDonald’s outfitters in the South Pacific, particularly for the McCafés.

The company has had an opportunity to produce up to 500 McCafés on the west coast of America, but within Napier and New Zealand it is unable to meet that demand. So it is now looking at joint manufacture in China of some of the refrigeration units, and at exporting some of the product to China in order to add to the manufacture and take up some of its export opportunities. As a company it will also have to deal with Part 4. It will have to make sure that it is conforming to the electrical and electronic equipment standards that are required for export under this free-trade agreement. I think this is a great opportunity for those two companies, and I thank you, Madam Chairperson, for the opportunity to speak.

TIM GROSER (National) : Essentially we are dealing with the same underlying issue. This part is enabling legislation to make changes to the Electricity Act 1992, in order to allow the concept that we have been discussing under Part 3 and Part 4, the mutual recognition agreement, to take place. So let us quickly rehearse the key point here. This is not about adopting China’s standards; this is based on New Zealand standards. But we are relying, in this particular defined area, on conformity assessments that the New Zealand standards in respect of imports from China have met the requirements of our own Electricity Act—and vice versa in respect of Chinese standards, which are often based on similar international standards. Therefore, it is taken as read that our exports are consistent with Chinese standards before they leave the shores.

That has a number of advantages for our exporters, and we heard two excellent examples of that from my colleague Mr Tremain. I am familiar with both of those companies. They are the sorts of knowledge-type companies that this country so desperately needs. Of course, we would like to see some of them step up in terms of scale. Frankly, in order to transform our country we need to have only about 20 Fisher and Paykel Healthcares, if you will—I could use another example—to utterly transform this country and get it back into the top league of developed countries. That will be done by small steps, including through this very important agreement to provide the best possible framework for the future export growth of those companies, which are based on the creativity of New Zealanders that all of us in this Chamber know exists up and down the country.

The second point I would like to make is that Part 5 is not just about the New Zealand regulations; it is also about reciprocity—the export of New Zealand. If we look at clause 28(2) and (3), we see specific reference to exports from New Zealand “pursuant to the Conformity Cooperation Agreement”. Clause 28(2)(b) adds some definition to that, as does clause 28(3). So we are talking about a reciprocal agreement of mutual benefit to both parties to the free-trade agreement.

China now seems to have acquired the title “the workshop of the world”. It is an intriguing title when one reflects on the fact that a little more than 200 years ago that title was given to the first country ever to make the transition from an agrarian to an industrial base, the United Kingdom—the workshop of the world, it was then known as. Now we have a new and giant contender. We will be relying on Chinese electronic goods for many purposes in our own country over the next 25 years, as a simple reflection of that fact.

I do hope that this agreement provides New Zealand consumers not only with greater assurances but with the right sort of framework to see cooperation of an overtly commercial nature develop, of the type Mr Tremain was indicating in respect of voltage regulators. The voltage regulators used in semiconductor factories are the most sophisticated types of regulators that exist in the world, given the fact that each semiconductor factory requires investment these days of between US$4 billion and US$6 billion. So voltage change is a fundamental issue for those companies, and it is great to see a New Zealand company has stepped up to the mark and is working with a giant electronic industry in East Asia, and particularly in China. I have no doubt that this agreement will help companies of that type.

I will make just a few observations about the underlying concept of mutual recognition, because I think it is a difficult concept to grasp. It is really an alternative to business harmonisation policy in trade agreements. Once we have dealt with the first-tier issues of overt frontier protection, then we try to work out how to reduce barriers to trade by measures behind the frontier. This concept is of that type.

JOHN HAYES (National—Wairarapa) : I am now speaking on Part 5, “Amendments to Electricity Act 1992”. This is very similar to—it is almost a mirror of—Part 3, which deals with radiocommunications, but this part clearly influences issues around electrical machinery. The point of it is to create regulation-making powers to enable legal action to be taken against persons who do not fulfil the requirements of international obligations while purporting to do so, and to provide for the seizure, sealing, or impounding of products in cases of non-compliance with the requirements of the two Acts. This also operates through an Order in Council, and surely my colleagues in New Zealand First, United Future, the Green Party, and the Māori Party would understand that it is in the interest of New Zealand consumers of electrical products—

Hon Peter Dunne: We’re in favour of the bill.

JOHN HAYES: —sorry; I thought the member’s party was voting against it—and exporters of those products to have that legal safeguard.

As my colleague Mr Groser has pointed out, we are dealing here with a tier-two issue. The trade remedies section of the free-trade agreement has preserved New Zealand’s rights to apply safeguard measures within the World Trade Organization’s umbrella arrangement. That allows either China or New Zealand to address situations where serious injury to a domestic industry is caused by increased exports due, for example, to reductions in a tariff or non-tariff barrier. China already has a very significant share of our export market and our import market, and the drops in our trading barriers, really since the mid-1980s, have meant that none of the provisions in this bill will have a significant impact on small to medium-sized businesses in New Zealand. So I think there are really significant strategic gains for our country to be had from the adoption of Part 5 and the legislation in it.

I really urge my colleagues in the Green Party to think about what they are voting against here. They are actually voting against the interests of New Zealand companies and New Zealand citizens. Why would they do that? New Zealand citizens elected them to come here to this Parliament to represent their interests. I cannot see that in a technical matter like this, those members can possibly vote against what is being suggested.

The technical cooperative mechanisms will be needed to minimise the impact of regulations on trade, and this process will also enable dialogue between our countries. Both countries will get a much better understanding of arrangements between them, because they will have mechanisms for discussing issues that may be concerning them. So I think that Part 5 is effectively a mechanism that will reduce transaction costs for our merchandise trade, because both countries will harmonise their requirements, or make their requirements the same. In the process of recognising an equivalence of the other party’s technical regulations, our regulations and the Chinese regulations will become the same. That conformity between our two countries has to be good; it actually has to be to the benefit of our communities.

I think that Part 5 provides a particularly good example of that second-tier benefit to our community, and I urge the Green Party, the Māori Party, and the New Zealand First Party to support this part of the bill, even if they cannot support the overall concept of the free-trade agreement. Thank you.

KEITH LOCKE (Green) : There was an article in the Independent just last week headed “Hidden hooks emerge in China FTA”, and I think the article does relate to Part 5. It is about standards—in this case, standards for electrical goods—and one chap by the name of Andrew Little, who is the national secretary of the Engineering, Printing and Manufacturing Union, is quoted here. I note that he is a member of the Labour Party and in some minds is pencilled in to be a future leader of that party. But he is rather concerned about some of these fish-hooks.

Andrew Little is worried, and he says his sector is worried, about the ability of employers and unions to verify and authenticate the qualifications of temporary Chinese workers. Instead of the Chinese industries being worried about New Zealand exports of electrical goods to China being in conformity with their standards, which this part is all about, they could say they will take over a New Zealand company, run it themselves, and import all the Chinese standards here. But, as Mr Little says, the quality of the work might not be up to our standards, if we cannot check properly the skills of the temporary workers who are to be allowed in under the free-trade agreement. There is a quota being allowed in, and who knows, really?

The standard of the skills can change in our regulations, but there is a clause in the treaty saying that if the skill standard in the New Zealand skilled migrant programme is raised for, say, electrical manufacturing workers, the old standard can continue to apply for up to 3 years to the quota of Chinese skilled workers who are to be allowed in.

The CHAIRPERSON (Hon Marian Hobbs): Mr Locke, you are actually straying away from the part.

KEITH LOCKE: No, it is to do with keeping in conformity with the standards for the export of electronic goods to China—

The CHAIRPERSON (Hon Marian Hobbs): Yes, but not to do with the skills.

KEITH LOCKE: In the case of Vector Wellington Electricity Network, the lines section of the electrical system has already been taken over by a Chinese firm, and that could well be extended into the manufacturing industry. That is a problem. Fletcher Construction chief executive Mark Binns, in this article, is also worried about the competition from cheap Chinese labour.

Throughout business, there are concerns. The latest Exporter magazine has just come out. It has a snap poll, and the first comment is “So what? There will be more in it for them than us.”—“them” being the Chinese. Another comment says “I have exported to China and am now working closely with the distributor but the Chinese authorities make it very hard, with all the documents and charges for getting products approved.” Another says “I might be old-fashioned”—this is an exporter—“but I want some of our country left for our children and grandchildren. If they are going to eventually earn 50c an hour, then I guess I could also go to China and make my fortune now and stuff the rest! But, no.” So that is the sort of problem we are up against when we just open the doors.

This part relating to the electrical standards is well meant, but in the context of the total agreement it might actually lead to a further undermining of the standards for our workers and for our industries, and not lead to any particular gain for the New Zealand people.

TIM GROSER (National) : I will make just a few concluding remarks about Part 5 in terms of the underlying mutual recognition agreement concept, since it is a very difficult concept for people to get their heads around, as I was saying before. It is essentially an alternative to what used to be flavour of the month 20 years ago: business harmonisation. We discovered in our first real attempt to do this—with Australia in the context of CER—just how difficult it is to advance harmonised policies, because at the end of the day what we are really trying to do when we say “harmonise your policy” is to say “You adopt my policy or I will adopt yours.” In practice, there is massive resistance from both sides to adopting an entirely new policy. It is so much more sensible to go down the track of mutual recognition, which, in common language, would be to say that there are more ways to skin a cat than one, or that there are different ways—if I use the refrigerator example again—to wire a refrigerator so that it is safe for kids to open and get a glass of milk, or whatever it is they want. There are different ways of doing that to achieve the equivalent results. So it is about coming out of that whole concept of equivalence without trying to say there is only one particular wiring diagram we can use to achieve the effect.

I do not know intellectually what the origin of mutual recognition is but, in a practical political sense in the trading arena, we sort of learnt this from the Australians. In Australia I found to my surprise that the actual concept of mutual recognition of different Australian states’ standards is actually of relatively recent origin, and there are still many areas and services where mutual recognition is yet to be achieved, if I am not mistaken. I became familiar with it when I was the lead negotiator for New Zealand on the Singapore free-trade agreement, and we introduced into the Singaporean mindset the concept of mutual recognition agreement. It was, I have to say, a revolutionary concept for the Singaporeans, deeply sophisticated though they are in electronic and other matters, and generally as a country. We had to arrange to sell them the underlying idea that we are talking about in Part 5. We had to take New Zealand experts to Singapore to educate Singaporean regulators on what the underlying conceptual approach was. It took a bit of time to sell, but it was incorporated into the agreement.

I think it is an excellent advance now to have taken this into a far, far more important trade agreement, the China free-trade agreement. Essentially, it reduces compliance costs and facilitates trade, and it is very much my hope that the Chinese in particular will see the point in extending this into other areas. In every case there has to be a high degree of trust amongst the regulators; it does not work if there is distrust between regulators. The problem in this area is that regulators are often specific to sectors, so quite a lot of people-to-people exchanges are needed to make this work, and a lot of information flow is needed. But I think that potentially the economic returns long-term are very, very considerable.

I hope that the Chinese as well as our own Government will use this entire trade agreement, including its mutual recognition elements, in a proactive sense. I have no doubt that New Zealand will be seeking to do that. I strongly believe that from a Chinese perspective this agreement makes sense, frankly, only if the Chinese can use this as a template for their own internal purposes and their own negotiations with countries—countries, let us face it, that are rather more important to them than their 45th or 48th largest export market, or whatever New Zealand is—and I hope that we will come back into a future Parliament and see introduced into it similar legislation that builds on this agreement.

PETER BROWN (Deputy Leader—NZ First) : I was not going to take a call on this part, but after listening to the honourable member I must make a few points. First of all, the Singapore - New Zealand free-trade agreement is hugely advantageous to Singapore. Let us not kid ourselves. Singapore has done very, very well out of that agreement. The member sits there and quotes—

John Hayes: Give us an example.

PETER BROWN: Singapore is of similar population size to New Zealand. China’s population is 1.3 billion, or something along those lines, compared with a country with a population of 4 million.

Gerry Brownlee: What’s Winston doing there?

PETER BROWN: Those members are embarrassed. They can ask questions only about irrelevant subjects at this point in time. If the member who has just resumed his seat thinks that China is going to harmonise its electrical industry because New Zealand has signed a free-trade agreement, then I ask him who the hell he thinks he is fooling. I think he might have fooled his own party, but I notice that Government members on this side of the Chamber are staying silent. They are not standing up in support, because they know in their heart of hearts that this will not deliver as Mr Groser tried to make out. If we wanted to buy umpteen refrigerators from the Chinese, they would be making them now for us. They would make them to the standard we wanted, sell them, and deliver them on Chinese ships. We are fooling ourselves if we think that this agreement will have a major influence on the Chinese electrical industry. It will not. We are but a teardrop in a river.

I have sat here all night trying to listen so I can find out what this trade agreement is about in detail. I have listened to the National Party people but I have not learnt or gleaned one iota from them. I can only conclude that they themselves do not even know what it is about. They think it is a good thing, and I give them credit for that, but they do not understand the details. I ask National Party members what is in it for the Chinese. If they think there is nothing in it for the Chinese, they really are fooling themselves. I have had some dealings with the Chinese people in other fields of endeavour, and I can say that the Chinese look after the Chinese first and foremost. I can say that when it comes to electrical goods the Chinese will be doing exactly the same as they do in any other field of endeavour, which is putting their own country, their own people, and their own economic well-being first. They do not particularly look after their people. In fact, the working people in China work under terrible conditions. But I will say that if we wanted to buy refrigerators, as the honourable member suggested we might want to, then the Chinese would build them by the million if that is what we wanted, and to the standard that we want here. But to sign a free-trade agreement on that rather naive basis is beyond words. It is stupid to the maximum.

I would like the National members to conscientiously address this issue and tell us what is in it. There was an invitation to have a wide-ranging debate, and National turned that down. I have not heard one of its speakers stick to the part religiously and tell us what is what, including this part. And the member there, who is putting his hands together, in major parts of his speech, talked of his concerns about what New Zealand First is thinking. We do not need a free-trade agreement to have a market in electrical goods with the Chinese. They would saturate us with anything we wanted. If we gave them the order they would allow our firms to go out and employ Chinese to manufacture there.

The CHAIRPERSON (Hon Marian Hobbs): Mr Brown, please keep to the part concerned.

PETER BROWN: I am keeping to the part concerned, but I am also actually responding to some of the comments from National members that you, Madam Chairperson, have let go, and I cannot let them go uncontested.

I have not heard one reason in the debate on this part, or any other part, why this nation should sign a free-trade agreement with the Chinese. I would like to hear something from the National Party, because its members are sitting over there saying that they know it all and that they have all the answers. Well I am saying that in years to come there will be a Tui sign, saying: “Free-trade agreement advantage to New Zealand? Yeah, right!”.

The CHAIRPERSON (Hon Marian Hobbs): Before I call Mr Brownlee, I just warn him that the debate will be wider when we get to clauses 1 and 2, which is really what that last speech was about. I do not want a repetition, so I hope that the member is going to speak on Part 5.

GERRY BROWNLEE (National—Ilam) : Of course I will follow the rules of debate. Madam Chair, you will appreciate that one of the rules of debate is that one gets to rebut at the start of one’s comments. So I will take a moment, with your indulgence, to rebut some of the extraordinary things said by Peter Brown.

First off, Mr Brown confirmed the xenophobic nature of New Zealand First. He then announced to the entire Parliament that New Zealand’s Minister of Foreign Affairs—New Zealand First’s party leader, the Rt Hon Winston Peters—is also a xenophobe. He is hanging around Singapore at the present time and trying to impress various foreign dignitaries, presumably touting his own CV so that he has something to do later in the year. But the extraordinary thing that came through from Mr Brown’s speech was the suggestion that the Chinese are being cunning here, and that they will swamp us with refrigerators and all sorts of electrical goods. So here is the deal: China, with 1 billion people, is looking to expand its market by doing a deal with a country with 4 million people in it. We are not even the size of a small suburb of Beijing, but apparently we will do wonders for the Chinese economy!

Well, I have some news for Mr Brown. Despite Winston Peters’ best efforts, New Zealand is still primarily an agrarian economy—we are great producers of agricultural products. One of the things that will surprise Mr Brown and New Zealand First is that a lot of the 1 billion people in China are hungry. They actually want to buy the proteins that we produce, they want to buy the milk solids that we produce, and they are very interested in the myriad of other products that we produce. They cannot get enough of them.

The CHAIRPERSON (Hon Marian Hobbs): Mr Brownlee, you are two-fifths of the way through your speech and you are not yet talking about the part.

GERRY BROWNLEE: Am I really three-quarters of the way through 5 minutes?

The CHAIRPERSON (Hon Marian Hobbs): Two-fifths of the way through. That is not a beginning.

GERRY BROWNLEE: Well, Madam Chair, I am rebutting a whole 5-minute speech, for goodness’ sake!

The CHAIRPERSON (Hon Marian Hobbs): Please come to the part.

GERRY BROWNLEE: I will not keep you a lot longer. I just want to say to Mr Brown that he should wake up and smell the roses. He should stop believing all the nonsense that his leader tells him. Most people know that most of what he says is a load of rubbish anyway.

• The question was put that the amendment set out on Supplementary Order Paper 215 in the name of the Hon Phil Goff to clause 28 be agreed to.

The CHAIRPERSON (Hon Marian Hobbs): Before we begin the debate on these clauses I will read members Speaker’s ruling 106/2. “When debating the preliminary clauses at the end, members should have some latitude to summarise, and make concluding remarks about, the issues they have raised during the committee’s consideration of the bill.”

TIM GROSER (National) : In the discussion on Part 5, which we have just heard, Mr Brown said he had not heard one reason from National as to why we need a free-trade agreement with China. He then added—and I wrote it down—“Tell us what is in it for New Zealand.” I know that it was probably not intended as a serious question, and I am even more certain that it does not deserve a serious answer. Nevertheless, ignoring those simple facts, I will proceed in the assumption that there might just be a New Zealand First person listening to this debate who is still wondering what on earth the New Zealand First problem with this bill is. I will try to answer the question as if it were a serious point.

I think we have to start with an appreciation of the fundamental challenge facing New Zealand economically. The fundamental challenge is to raise real wages. The fundamental solution is to increase total factor productivity, and the fundamental best way to achieve that is to increase the export orientation of our economy. We know that New Zealand, far from being a small but great trading nation, is actually at the absolute bottom of the heap of the 15 small developed countries with a population of 10 million or less in terms of the ratio of trade to GDP. It is of fundamental, long-term importance, even to those 4 to 5 percent who vote for New Zealand First, that we change this over the next 20 years.

A variety of things must be done in this country if we are to address this underlying economic challenge, and one of the issues is to provide markets for New Zealand. Anyone with any actual appreciation, let alone any real-world experience, of the international trading situation facing New Zealand in the last 30 years is well aware that of all the developed countries in the world, large or small, this country—our country—has been more constrained by the lack of access to markets for the products we produce competitively than any country in the world. There are myriad studies to back up that judgment.

So against the background of 30 years of, frankly, bitter struggle by “New Zealand Inc.”, both the major political parties have been in charge of the country, and we have had Prime Ministers, trade Ministers, farming leaders, and all manner of New Zealanders—including people like Dr Walker, and myself, in my former job—trying to find a solution for access for New Zealand markets. Then what happens? A giant emerging economy, which is responsible for 24 percent of the population of the world, comes to New Zealand’s door and asks whether we would like, essentially, completely free access, in about a decade, for whatever we can produce. I am sorry, but if one’s answer to that is no, one would have to be a prime candidate for village idiot of the year. That is the underlying point of this agreement, and it related right back, through that logical train, to the need to ensure that the young people coming up in our country can make a future for themselves in this country. The right way to do this is to provide competitive opportunities. This is fundamentally important to New Zealand.

We have a situation where we know that the Chinese people are moving up in the income world. Thirty-four percent of Chinese people are nowadays in the $1 to $2-a-day bracket. This is miles ahead of the other giant developing country, India, which still has something like 70 percent of its population in the $1 to $2-a-day bracket. We know that China will manage its way through the super-fast growth problems, the inflationary issues, and the issue of churn in its employment markets. China will continue to grow at a stellar rate. It will need this country—this small country of which we are all so proud—to provide the high-quality foodstuffs that Mr Brownlee just referred to in the first response to this, frankly, very ill-conceived attempt by New Zealand First to provide a thin rationale for its position.

PETER BROWN (Deputy Leader—NZ First) : Boy, when Tim Groser gets his knickers in a twist, they sure get in a tangle. Let me say to the honourable member who has just resumed his seat that I have here an extract from Exporter magazine. This is what it states: “For some exporters, New Zealand’s free-trade agreement with China is a decisive triumph, laying a clear pipeline for future revenues. For other China old hands, the FTA’s future benefits remain illusory, considering the sheer cultural divide and business complexity China poses.” It goes on to state: “Anecdotal evidence suggests Kiwi business owners are not rushing to the middle kingdom. Those already steeped in the Chinese market say the FTA with China should not be seen as a panacea to Kiwi exporters’ aspirations to crack the Chinese market.” If we listened to Mr Groser we would think it was the be all and end all of everything. But I say to the honourable member, what is in it for the Chinese? That is what we should be examining. I can tell him that they see a huge advantage. But Mr Groser told us, when he was debating the tariff issue, that we are going to export more wine and the Chinese are going to drink our wine by the bucket load. Who is he kidding? The Chinese culture does not allow its people to get involved in wine.

John Hayes: You don’t know anything.

PETER BROWN: The Chinese do not drink grape-produced wine in great quantities. I can tell members that now. This is not going to change it. For God’s sake!

Let me talk a bit about the humanitarian concerns that we share. China operates under a Draconian employment regime; that is the only way we can talk about it. It has very low wages—peanut wages—long hours of work for all ages, with no age restrictions; young people, old people, all working long hours for peanut wages. It has very poor working conditions, and little or no employment commitment from the employer. Is that the sort of people we want to have a free-trade agreement with?

Dr Wayne Mapp: You want it to go faster, Peter. Get your story right.

PETER BROWN: Well, we know that Dr Mapp wants to employ New Zealanders and sack them within 90 days. What about the working-holiday scheme that is in place? This is what it says in the select committee report: “The scheme is non-reciprocal, and provides for a maximum of 1,000 Chinese entrants per annum. As with other similar schemes, the scheme is an arrangement of less than treaty status.” On an earlier page in the same document, where it refers to temporary entry, it states that it will: “provide for entry of Chinese business visitors and installers/servicers for up to three months in any calendar year. Executives and managers are permitted to enter as intra-corporate transferees, for up to three years. Also as intra-corporate transferees, senior specialists are permitted to enter for up to 12 months and other specialists—subject to labour market tests—for up to three years.” That is what we have agreed to. That is what we are rolling over. That is what this country is giving in to. I can tell the Committee that the Chinese have more intelligence in their little finger, than that group of National Party MPs have in their whatever.

I know that this agreement will pass tonight, but I would have liked to see it pass for the right reasons. I have sat here and listened to National members for 2 or 3 hours now and I have not heard anything worthwhile. They have given me the total impression—and I have tried to approach it objectively—that they are rolling over for the Chinese and they want the country to roll over for them, too. The Chinese have 1.3 billion people; we have 4 million people. They are taking us in and making fools of this nation. This party, and the Greens and the Māori Party, say that we will put New Zealand’s interests first, and this free-trade agreement is not doing that.

KEITH LOCKE (Green) : Tim Groser, quite a bit earlier on, was particularly worried about using this trade agreement in some way to advance human rights concerns—that is, in relation to the Green position that it is very bad timing to be signing an agreement a couple of weeks out from the Olympic Games when there is such a huge campaign to try to use this period to improve the human rights of Chinese people by supporting those millions of Chinese who are struggling against the one-party State that rules over them for greater human rights.

The arguments used by Tim Groser were in contradiction to our foreign policy. One of his arguments was that there are human rights violations everywhere and that if we used trade to advance human rights concerns we would have to use it against all of those countries. We are selective in our foreign policy as to how we use whatever instrument, a carrot or a stick, to achieve a gain for human rights. In South Africa we used sanctions; in other countries we have used other ways. There is anything from sanctions to rewards. The Green position is not to put any additional sanctions on China. We support trade agreements with China. We support trade with China. What we are against is giving a preferential agreement—free entry of Chinese goods into our country—and signing this agreement right at this time, which is the very wrong time to do it. We can have the arguments about the goodness of the agreement as a whole, but the timing is completely wrong. The idea that we do not use instruments or rewards in foreign policy to achieve human rights gains is totally wrong.

There is the idea that economic development and the development of an educated middle class etc. is commonly accompanied by an improvement in human rights, and that has happened to some degree in China today. There have been some advances, but that does not always happen and it does not always happen if the world tolerates dictatorship. We saw it in Germany, which was the most advanced industrial country. That did not mean to say that it was advanced in human rights during the Hitler period. We see it today in the most advanced economy, the United States, where there has been a huge deterioration of human rights—for example, Guantánamo Bay, the complete abuse of proper trial procedures, high rates of execution, etc, which have been a very bad model for human rights in the world, and that is in the most developed economy. So there is more to it than just saying that industrial development will be good.

I think that the idea that trade is the answer to everything is wrong, too. Sure New Zealand has advanced through being a major trading nation, but it is not necessarily the best way forward to say that we will replace our manufacturing economy and we will let Chinese competition, through low wages, smash that, and that we will compensate by increased agricultural exports. That would end up with an economy that is not balanced and that is more at the whim of the international economy and international markets etc. That is not the future.

The ideology that trade is everything and the proportion of trade to GDP is everything is not the way forward for New Zealand, particularly as we approach peak oil. The costs of trade, in some respects, will increase and countries are looking to greater food sovereignty and such things, and rightly so, given the way the international market in food has led to huge problems in many countries. There are huge increases in price because the free-trading environment is often substituted for local food production, and that has led to much higher costs and devastation for millions of people worldwide. We see that in the big demonstrations and riots that are occurring in several countries. That is partly a result of the ideology that trade is everything and balanced economies are nothing. Thank you.

Dr WAYNE MAPP (National—North Shore) : I guess those closing remarks by Mr Keith Locke say it all! He would say to New Zealand farmers that they are wasting their time and should not produce anything for the international market. He does not think anyone should buy their products. In his view, who really cares that New Zealand is the most efficient producer of dairy products in the world and the most efficient producer of meat, and who really worries that trading is how we primarily derive our international income? He thinks that farmers should be focused on supplying the New Zealand population. I guess there was a time—a few hundred years ago—when New Zealand had a population of about 200,000 and supplying our population was all that was done in this country. It was local agriculture for the supply of those people alone. The truth is that our production then simply did not reach the potential, in the slightest sense, of this country.

I remind Mr Locke that this world has 6 billion people. We need food to be grown in the most effective and efficient places in the world in order to sustain that population. If there was not international trade, the world simply could not support a population of 6 billion people. I say to Mr Keith Locke that his understanding of economics, as shown by those last comments, is frankly appalling.

Keith Locke: I’m not against trade.

Dr WAYNE MAPP: He says he is not really against trade, but his policies would stop the world being fed. He is simply wrong, and his policies are false.

The second argument by Mr Locke that I feel I have to address is the human rights argument. He said that China is having an Olympic Games and therefore it is a bad time to have a free-trade agreement. What an absurdity! I would have thought the complete opposite of that. China is opening up to the world. Yes, there were difficulties in Tibet, and, interestingly enough, this time China understood the world’s message on that and was substantially more restrained than perhaps it would have been in earlier years.

Tim Groser: 1989.

Dr WAYNE MAPP: Yes, in particular it was more restrained than it was in Tiananmen Square in 1989, as my colleague Mr Groser has mentioned. So China has learnt that being internationally engaged brings with it international responsibility. Am I saying China is perfect? Obviously, I am not. China has a great way to go yet, but it has hugely improved compared with how it was in 1989 and in years prior. Almost all of that is because China is now open to the world; the world looks at it and judges it. China has the Olympic Games, and this is the perfect time to have a free-trade agreement because it cements into being that opening to the world.

As for the views of the New Zealand First Party, I say to Mr Peter Brown that he should get his story right. His leader said that New Zealand First was opposed to the free-trade agreement because it was not fast enough; he said getting completely free trade in 10 years was not fast enough. I guess I would have to say to the officials that if they wanted a New Zealand First vote, they should have negotiated a 5-year phase-out of tariffs, and they might have got New Zealand First’s vote then. If that is the argument, then Mr Brown cannot say this is a bad agreement because it opens New Zealand up to trade. The story has to be one or the other; it cannot be both. I suggest that Mr Brown talk to his leader and get his story right.

National does support this agreement, for profoundly important economic reasons. Mr Groser set those reasons out superbly. New Zealand’s future is as a trading nation. We have an extremely poor performance amongst small OECD countries, and I know the Government knows that. The work by David Skilling shows that amongst the 15 small OECD countries, the proportion of our economy that is devoted to international trading is actually the lowest. We should be doing better and we have to do better. The way to do that is to find the points of advantage—to find the trade agreements. This agreement is such an agreement. Indeed, I say to the Government that this is a very important agreement, and I acknowledge that. When the historians look at the record of this Labour Government, they will say this agreement should go down as one of its significant achievements. Why would any party in this House vote against it? Why would a party say to New Zealand farmers, to New Zealand businesses, and to New Zealand workers that it would stamp out their opportunities?

MARTIN GALLAGHER (Labour—Hamilton West) : I will take a very brief call, but it is appropriate for me, as chair of the Foreign Affairs, Defence and Trade Committee and as one who sat through the select committee process on the New Zealand-China Free Trade Agreement Bill—and I know that the Leader of the House would want me to do this—to fulsomely praise and thank the officials at this stage, because the committee received some very comprehensive advice. I point out that we have had a very good working select committee, and I acknowledge particularly Mr Tim Groser for his excellent assistance. I also respect absolutely and acknowledge the diversity of views that was represented both in the submissions and by members of the committee. I acknowledge the very fine contribution of Keith Locke, albeit we agree to differ on this issue. However, his contribution was important. I also acknowledge Peter Brown, and I do that in this democratic Parliament tonight.

The challenge on those of us who are supporting this agreement, which is the will of the overwhelming majority of the House, is to do everything we can and to work to make sure that some of the concerns and fears that have been expressed do not come to pass. In terms of the glass being half full or the glass being half empty, the point of view that the glass is half full offers huge potential for this agreement.

I will close with a quote from our Prime Minister, who stated: “The agreement sets a high standard. It is a model for how two trading partners, disparate in size but complementary in the products and services they offer, can take a trading relationship to a new level.” Hopefully, it will be a win-win situation for both countries. That is our intent.

Having said that, let me acknowledge all members of the select committee for the excellent contribution they made in terms of the report back. We look forward to the third reading of the bill.

JOHN HAYES (National—Wairarapa) : A number of things have concerned me, starting with the recent comments by Peter Brown from the New Zealand First Party. He said the Singapore free-trade agreement had significantly benefited the people of Singapore, and then proceeded to give absolutely no example to prove his point. I think that was outrageous.

Second, I would also like to address the issues that seem to be disturbing New Zealand First and other parties in this House, including the Māori Party, who think that China’s lower-wage economy than ours will in some way cause huge damage in our economy. The protectionists in this Parliament say that because the Chinese make television sets, toys, and clothes more cheaply than we can, our people will lose their jobs unless we protect our domestic production with taxes on Chinese products. Well, there are countries that do that sort of thing. The international textile trade, for example, is subject to very, very complex trade regulations right across the world. If members think about it, they will realise agriculture is considerably protected in many countries—for example, Japan and the USA—and that is a direct problem for the people in my electorate who produce agricultural products and want to export them.

New Zealand First, the Green Party, and the Māori Party say we should stem the flow of goods into New Zealand, particularly the cheap ones. Well, I would like to refer them to an economist called Ricardo, who many years ago said the best thing a country could do was to get rid of trade barriers. Even if the country could not produce something more efficiently than something produced in another country, he said the objective was to remove the barriers to trade because doing that would help both countries. For example, China may be far more efficient than New Zealand at producing wide-screen television sets or rice, but rather less proficient than New Zealand at producing dairy products. China and New Zealand must stick to producing what each country does best; New Zealand must do that and China must do that. If there are no trade barriers between our two countries, then we have both got to be better off and the communities in our country must be better off. We need to address this issue, because we must stop our people leaving New Zealand in droves. We must give them higher standards of living here, and this trade agreement will do that.

This trade agreement will not destroy our jobs. It is not possible for this country to stop exporting, and to import everything from abroad, because we would have nothing to pay for the imports with. If one does not export one cannot import, because one has no money to buy the imports with. So it seems to me that New Zealand must export to the global markets, and it must pay for imports from wherever those products are cheapest. As I said a couple of days ago, in response to Māori Party concerns, free trade is fair trade. The transaction does not have to happen if the two parties do not want it. It is quite clear that when two people discuss engaging in a transaction, one party can say yes and the other party can say no. The transaction does not have to go ahead. People engage in a transaction because each party will be better off by doing so. Each party wants to engage in the transaction.

This bill is the most significant legislation that has been put forward in the life of this Parliament. It will provide benefits to our communities long past the life of every person in this parliamentary complex. I support this bill, and the National Party supports it wholeheartedly. Again, I would just thank the officials involved in putting the detail of the agreement in place.

CHRIS AUCHINVOLE (National) : This bill puts New Zealand first; that is what it sets out to do. I was dismayed to hear Mr Brown saying that he did not consider it to be a good bill, that he thought all sorts of fish-hooks were being revealed, and that it was basically a bad thing for us to be engaged in. I am sorry that some parties feel that way, and I am dismayed that they see things in that way. I appreciate that their concern is genuine and sincere, but in my view it is misplaced. The vulnerability that they perceive we have is without foundation, but it is emotionally understandable.

The reality is that New Zealand is already a pretty wide open market for goods from China, but China has not been open to us. The great wall was secure in the form of tariffs, but the free-trade agreement opens up that wall to our trades, our businesses, our entrepreneurs, our enterprises, and our marketing and selling skills—and New Zealand has those skills in considerable quantity. Speaking from experience, I say that what exporters need is certainty in terms of the opportunities before them—not deal by deal, and not one opportunity at a time, but certainty in terms of country to country relationships. For decades our traders have been excelling in the work they do. What an opportunity they now have. As I said, I am saddened by the lack of vision in the speech by Mr Brown. China is a very substantial producer and exporter of food, and, as has already been demonstrated in previous speeches, the continuing economic improvement and well-being of the people of China will create an ever-increasing demand for our products.

Another frequent concern expressed in relation to the free-trade agreement with China, which I find ironic, is that it could result in a single market taking all our products, so we will become dependent on a single market. That is not actually how trade works. The popularity of our products, and the demand for our products in China, will result in increased demand from other markets.

Let us reflect back. We used to be single market - oriented. We used to send all our products to dear mother England, and that was the basic market.

Hon Dr Michael Cullen: And Scotland!

CHRIS AUCHINVOLE: I thank Dr Cullen. I well remember New Zealand products being consumed at our table, but then the UK joined the Common Market. I remember being in Hokianga—and this point relates particularly to the opportunity for free trade—and having a discussion with a neighbour who said we were finished as a country. The reality was that this point was just the beginning of New Zealand embarking on open trade rather than being single market - oriented.

As a country we have had a celebrated period of remarkable good fortune. This has not come about through Government policy but through good fortune in respect of overseas prices for our products. But we are now in a recession. How quickly things have changed in the last 6 months. We need our exporters to be more dynamic than ever. This bill will allow them that opportunity. We need the money, we need to create wealth, and this free-trade bill will enable us to increase our opportunities to do that. Thank you, Madam Chairperson.

Hon GEORGINA TE HEUHEU (National) : I am very pleased to take a call during this part of the debate, and to follow my colleagues and confirm, categorically—obviously—that National supports the New Zealand-China Free Trade Agreement Bill, and why would we not? It is the only way our country will move forward. It is the only way we will grow our economy. It is the only way we will trade our way in the world. We live in a global economy, and a global economy means free trade. Free trade, as my colleague said, is also fair trade, because both parties find their areas of comparative advantage in any event, and that is one of the things that this free-trade agreement is all about.

This afternoon I raised the issue of Māori business. Clearly, this free-trade agreement is a landmark event for the growing Māori economy. That economy, as we have seen, has developed rather slowly over the two previous decades, but it is now reaching its zenith. Given the many assets that have been returned to Māori in Treaty of Waitangi settlements—fish, land, and areas in terms of the farming enterprises being developed—it is critical, since a lot of Māori businesses are export focused, that we are able to trade with an economy that is becoming the biggest economy in the world.

This afternoon I put out a quote from Hui Taumata 2005. They saw that the best way for Māori development to improve domestically and internationally is through economic growth through trade with the rest of the world. My colleague Dr Mapp said that our future is with trade. Well, if our past has been with trade, which it has been—the ability to trade with the world—our future most definitely is. It is a disappointment to me that members of the Māori Party should see no overall benefit in this free-trade agreement, particularly when they are so focused on Treaty settlements and on the return of assets to Māori. As I said, those assets are in forestry, fisheries, and land assets.

My question to Māori Party members—and I hope they take a call this evening—would be: “What are we going to do once all those assets are returned?” Will we sit on them in our little valleys and do nothing? We will trade with ourselves and do business with ourselves? Where would that get us? It is a nonsense—an absolute nonsense. If we think about the other side of the equation, about jobs for our people, we see that this agreement is a guarantee of jobs for our people. It gives us the ability to trade, to create wealth with our assets, to take care of iwi and ordinary individuals, and to make sure that their future is guaranteed. It is not guaranteed by sitting in one’s valley with one’s assets and not doing anything with them. Do we achieve anything by sitting on our hands? No; I cannot figure that one out.

As I said, I would be interested to hear from members of the Māori Party about that. Perhaps Te Ururoa Flavell might take a call this evening, help me with my predicament, and tell me why the Māori he seems to represent would not see this free-trade agreement as a historic agreement that will be a landmark in Māori development. I am very proud to be part of the National Party, which supports the Government in what it has done.

Dr Wayne Mapp: Let’s not get too carried away.

Hon GEORGINA TE HEUHEU: Maybe my colleague Dr Wayne Mapp gave the Government more praise than he should have.

Our team was led by my colleague Tim Groser, who set out admirably exactly why this free-trade agreement is so important to New Zealand. I endorse everything he said. He ought to know; he has worked in this area for—what; 30 or 40 years?

Tim Groser: Too long!

Hon GEORGINA TE HEUHEU: It is never too long. He has had a full career in this area, and he, more than anybody in this Chamber, this House, this Parliament, knows just how important this free-trade agreement with China is.

Hon PETER DUNNE (Minister of Revenue) : I move, That the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill be now read a first time. At the appropriate time I shall move that the bill be referred to the Finance and Expenditure Committee for consideration. This bill introduces a number of important business tax reforms that are variously aimed at helping New Zealand businesses compete internationally and at reducing business tax compliance costs. They complement each other and also other recently enacted reforms, such as the reduction of the company tax rate from 33 percent to 30 percent and the introduction of the new research and development tax credit, which was designed to encourage companies to invest more in research and development. The focus of other reforms in the bill is on updating tax law to align it with today’s commercial environment, ensuring the law works effectively and as it was intended to work, protecting the revenue base, and further strengthening New Zealand’s culture of charitable giving.

The central feature of the bill is the proposed reform of New Zealand’s international tax rules to help New Zealand-based companies compete more effectively overseas. In my view this is one of the most important tax reforms to come before this House, because what is being proposed is a complete change of direction in the way we tax the offshore income of our controlled foreign companies—by which is meant foreign companies that are controlled by New Zealand residents. At present we tax all the offshore income of these companies, with the exception of income from operations in the so-called grey list of eight countries that our law at present singles out as having tax systems comparable to our own. In that respect we are completely out of step with what happens in much of the rest of the world. Many other countries, including our main trading partners, distinguish between passive income—such as that from interest, dividends, rent, and royalties—and active income, such as income from manufacturing, and exempt the latter from tax. Therefore, the fact that our controlled foreign companies are taxed in New Zealand on their active income puts them at a competitive disadvantage internationally.

The cornerstone of the proposed reform of our international tax rules is to exempt from domestic income tax the active income of controlled foreign companies of New Zealand resident businesses. That is intended to encourage businesses with international operations to remain in New Zealand, as well as to enable them to compete effectively in foreign markets. The passive income of these companies will still be taxed as it is earned, although there will be some exceptions to the rule. For example, it will not apply to passive income for controlled foreign companies in Australia, which is usually the first port of call for our smaller businesses that are seeking to expand overseas. There will also be an exemption for passive income that is less than 5 percent of a company’s total income. Other important features of the reform include exemption from tax of most foreign dividends paid to companies, as well as measures to protect our revenue base when the active incoming exemption comes into force.

The bill also introduces further measures aimed at reducing tax compliance costs for small and medium-size businesses, of which there are many in this country. Lacking the resources of larger companies, smaller businesses tend to bear a disproportionate tax compliant cost burden. Reducing tax-related compliance costs is an incremental process consisting of many small steps. There is no single solution to the problem, short of abolishing tax altogether. A measure that will help one small business may not help another, since businesses vary significantly in their needs, operating styles, and problems. Compliance cost reduction measures introduced in recent years have included, for example, the alignment of payment dates for provisional tax and GST. That change was designed for small businesses that prefer to make smaller and more frequent payments of provisional tax to help them with their budgeting. Likewise, some of the fringe benefit tax rules were changed with smaller businesses in mind—for example, the minor benefits threshold under which the tax is not payable was raised, and a tax exemption for business tools was introduced.

The changes proposed in this bill raise several other tax thresholds. They include, for example, the PAYE threshold above which employers must file and pay deductions from employees’ salaries twice a month. That threshold is being raised from $100,000 to $250,000, a change that will allow a greater number of small employers to pay their deductions to the Inland Revenue Department once a month instead of in accordance with the current procedure, thus saving them both time and money.

The bill also clarifies the law to ensure that employer payments for employee relocation and overtime meal allowances are exempt from income tax and fringe benefit tax if certain criteria are met. These changes, which were announced last year, simplify the law and remove longstanding uncertainty about the tax treatment of these payments, which will save time and money for everyone involved.

The bill also modernises the tax rules relating to the life insurance business, which date back to 1990. Since then, products and business practices have changed significantly, with the result that the tax rules are out of date in several areas. For example, many term insurance profits are under-taxed today, with profitable business often leading to tax losses. The reason is that term insurance was a very small part of the business in the late 1980s, so it was not a big consideration in developing the rules at that time. Today, term insurance is a major part of the business, and by being under-taxed it enjoys a considerable subsidy under the present tax rules. A further anomaly in the rules is that people who save through life insurance products face a heavier tax burden than do savers who invest directly or through managed funds that become portfolio investment entities. Under the proposed reform, the term life insurance business will be taxed on actual profits, as other businesses are taxed, and many of the tax benefits of the new portfolio investment entity rules will be extended to all savers in life products.

The petroleum mining tax rules are also being updated to remove potential disincentives to further investment in oil and gas exploration and development in New Zealand. At the same time, the bill introduces measures to ensure that New Zealand receives its proper share of the benefits from our growing petroleum mining industry. To safeguard New Zealand’s taxing rights on its own petroleum resources, the changes will allow expenditure on petroleum mining operations undertaken through a foreign branch to be offset only against income from petroleum mining operations outside New Zealand.

As a further measure to protect the revenue base, the bill introduces a number of changes to strengthen the definitions of associated persons in income tax law. The definitions are used primarily to counter tax practices that could undermine the intent of our tax laws because of the closeness of the relationships of the people or entities involved, whether they are relatives, trusts, partnerships, or companies. The definition relating to land sales is in particular need of strengthening to prevent land dealers, developers, and builders from circumventing the land sale tax rules by operating through associated persons. It is important to stress that the law that gains on land sold by dealers and others in the business are taxed if the land is sold within 10 years of acquisition is not new. That provision was stated in law as long ago as 1973—35 years ago—when Parliament enacted the current land sale tax rules. This bill closes the gaps in the definitions of associated persons that allow that tax obligation to be sidestepped. The bill also makes the other definitions of associated persons more robust. For example, it will no longer be possible to use certain trust structures to circumvent the tax rules. Similarly, it will not be possible for companies and shareholders to avoid being associated by fragmenting shareholdings amongst closely related people and entities.

The bill also introduces further measures to strengthen the climate of charitable giving in New Zealand. These build upon related tax changes that came into force this year, removing the caps on the dollar amounts of charitable donations eligible for tax relief. The bill introduces a voluntary payroll-giving system that will operate through the PAYE tax system. People whose employers adopt payroll-giving will be able to donate regularly to charitable and philanthropic causes of their choice through work-based payroll deductions. They will receive the tax benefit of their donations each pay day without having to present donation receipts. The voluntary scheme will be open to employers who file their employer monthly schedules with the Inland Revenue Department electronically. It is a fact that growing numbers of employers see social responsibility and good corporate citizenship as an important part of their business, and these measures are designed to strengthen them in that work and to encourage them and their employees in that regard.

On a similar theme, the bill also clarifies the law relating to the tax treatment of honoraria for voluntary work and the reimbursement of volunteers’ expenses. That will make life much easier for both volunteers and charitable organisations, which often incur unnecessary compliance costs in trying to understand their tax obligations.

These are but brief descriptions of the main reforms proposed in this omnibus tax bill. Time simply does not permit a more detailed description of every measure, so I refer members to the separate, slim, 160-page commentary on the bill, which describes the changes in more detail and has been distributed to members already. On that note, I am happy to commend the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill to the House.

Dr the Hon LOCKWOOD SMITH (National—Rodney) : In—[Interruption] What was that comment? I note the arrogance of Dr Cullen, who is very happy to let people know that he was a Commonwealth scholar and did a PhD. He should acknowledge that some other people in this House were also Commonwealth scholars.

In introducing the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill to the House just now, the Minister of Revenue, Peter Dunne, commendably emphasised the positive aspects of this bill, but he brushed over the aspects that impose very real extra compliance costs on New Zealand businesses. Despite that, National will support this legislation going to the select committee. We support it because there are a number of important moves in it that we see as being very positive. For example, we support the move to the introduction of an active income exemption in respect of the income tax treatment of controlled foreign companies or corporations. We support the introduction of tax deductibility for regular payroll donations to charity. It makes good sense. We support the increases to tax thresholds, such as the provision for once-monthly payments of PAYE instead of twice-monthly for businesses whose annual PAYE deductions are under $250,000, rather than $100,000. We support those measures because they make good sense, just like the increase in the threshold for the filing of GST returns on a 6-monthly basis does. For that process to be available in the future to businesses with an annual turnover of less than half a million dollars, rather than a quarter of a million dollars, makes good sense because it will reduce compliance costs.

Those three measures are positive moves, but it is so typical of this Labour Government that on the one hand it gives but, because it cannot bring itself to let go of any tax revenue, on the other hand it must take away. It just cannot help itself. Let me give members an example of what I mean. The Minister mentioned the active income exemption as one of the most important aspects of this legislation. That is a good move. We support it because it makes good sense and it is consistent with the way that most countries treat their controlled foreign companies. But what of the extra compliance costs for business associated with the shrinking of the grey list from eight countries down to one? I am not saying that that should not be done, but we should think about the compliance cost implications. What about the competitive disadvantage we face from repealing the conduit rules? Now, other countries that have an active income exemption still have rules like the conduit rules. Does that place us at a competitive disadvantage? What about the extra compliance costs associated with the introduction of the interest allocation rules? We know why the Government is moving to introduce those interest allocation rules, but what about the compliance costs? It is no good for the Minister to say, on the one hand, that all these measures reduce compliance costs—for some of the measures do—when, on the other hand, a whole range of other measures actually significantly increase compliance costs for businesses.

The point I am making is that members will need to listen carefully to argument at the select committee to make sure that these issues are very carefully considered, because they have significant ramifications for the competitiveness of our foreign-owned corporations and for the control of our foreign-owned corporations. I emphasise that it is not a clear-cut situation where all of this is simply reducing compliance costs. There are measures there that are increasing compliance costs and challenging our competitive position, and we need to listen to what the arguments are at the select committee.

If the interest allocation rules are complex—and they are—I invite members to have a look at the taxation of life insurance businesses that this legislation changes. One of the positive measures—and there are positive measures here as well, as I have said before—is the extending of the benefits of the portfolio investment entity rules to all savers in life products. That is a positive move. On the one hand we are giving this positive move but, on the other hand, the Government seeks to take away, because the increased tax imposition on underwriting of risk business, for example, will probably see premiums go up. People will benefit on the one hand from the portfolio investment entity rules being extended but, on the other hand, they will face higher costs because insurance premiums will probably go up. The legislation will be complex. There will be compliance issues here. If one looks at the way shareholder base income provisions and the policyholder base income provisions are defined in the legislation, and look at the way insurance businesses will necessarily require actuarial apportionment of income between those two accounts, one will see that there will be significant changes to their accounting and tax systems at a time when insurers are already dealing with portfolio investment entities and KiwiSaver legislation, as well as the changes to the financial reporting standards internationally.

We have a complex set of provisions around the income tax treatment for life insurance businesses. If anyone suggests that it will not be complex, I say they should just take a look at the provisions. They should take a look at the allocation of income between those two base accounts—the shareholder base income account and the policyholder base income account—and look at the way money will have to be apportioned between the two actuarially. That will impose compliance costs, and, again, the select committee will need to listen carefully as to how serious these increased compliance costs will be. I notice Michael Cullen, the Minister of Finance, laughs as if compliance costs are all a joke. I say to the Minister that these compliance costs are real. Business are making it very clear that these costs are real. He risks a very important aspect of New Zealand business activity if he thinks all of this is just a joke. [Interruption] It is not a joke. Compliance cost is real. Little Darren Hughes next to the Minister would not have a clue, because he has never had a real job in his life, and would not have a clue what some of this stuff actually does. We need to listen carefully at the select committee.

If some of these complex provisions are not enough to fry one’s brain, one should have a look at the new base protection provisions around the “associated persons” provision. Apparently the Government is concerned about the land sale tax rules for land dealers, developers, and builders caught by the old 10-year rule, and I suppose the Government is concerned that where one has associated persons it is possible to get soft deals minimising the tax liability that they should face. We have no problems with these issues being addressed, but we must make sure that the benefits we get out of them are not less than the additional costs that we impose over these businesses. These associated person provisions are complex. If any member does not think they are, he or she should have a look at how they will work and explain to the House how the tripartite tax associated person provision works—it is complex. We will need to look at it very, very carefully at the select committee.

If that is not enough, the new tax provisions for the emissions trading units will be interesting. The Government does not have this legislation through the House yet, but this bill contains the new tax provisions for those emissions trading units. Again, forestry interests will face some complex issues. For some reason or another some of the forestry interests will be under the provisions of the Income Tax Act 2004—not the current Income Tax Act 2007. I would not mind if one of the Government members would explain why we still have to amend the Income Tax Act 1994, the Income Tax Act 2004, as well as the Income Tax Act 2007. I thought we had rewritten all the income tax Acts and brought all the provisions together into the 2007 Act. But, no, certainly the forestry interests under the emissions trading provisions in this legislation will be operating under the Income Tax Act 2004. That is a complexity, and I would like someone to explain why on earth that is necessary. One of the positive things, though, is that at least the emissions trading units will be zero-rated for GST purposes.

So we can see that these are very complex issues. There is a balance of positive moves but there are other measures that will impose significantly increased compliance costs. The select committee is in for a lot of work on this bill.

Hon Dr MICHAEL CULLEN (Minister of Finance) : One would hate to hear the member when he is opposing a bill if that was a speech in support of one. The member certainly managed to praise with faint damns this particular measure, and he managed in the course of that to miss the entire main thrust of the legislation while focusing on some minor issues within it.

Dr the Hon Lockwood Smith: Minor issues?

Hon Dr MICHAEL CULLEN: Minor issues indeed—minor issues indeed.

Let me come to the most important part of this Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. It follows on very nicely from the previous legislation we have been discussing. What this important part on the active/passive distinction is about is whether this country will have an outward-looking taxation system or an inward-looking one. Of course, what the member did not tell us was that this part of the legislation replaces the failed legislation that he helped put in place in 1991-92, which did not have any such exemption for active income. There will, of course, be some who will argue that what this will do—

Dr the Hon Lockwood Smith: But it did have a good grey list.

Hon Dr MICHAEL CULLEN: “Locky” has had his speech. I ask him to strap the budgie-smugglers down and listen for the next few minutes. What some people will argue about this bill—

Dr the Hon Lockwood Smith: What an arrogant Minister!

Hon Dr MICHAEL CULLEN: What is arrogant is continuing to interject when somebody else is speaking. It is high time the member learnt some manners instead of just talking in a poncy fashion. There is a difference between those two things.

What some people will argue about this bill is that it will encourage people to move manufacturing capacity offshore. The reality is—[Interruption] I knew the Greens would; they could not help themselves. As soon as the word “international” appeared in the bill we knew we would be in trouble in terms of the Greens’ vote on this bill. As soon as we had the term “controlled foreign company” they probably thought that it meant an overseas multinational. It means a New Zealand company that controls foreign companies offshore. The fact is that some manufacturing capacity will move offshore to lower-cost countries. The real issue is, firstly, whether we want New Zealand companies to internationalise or whether we believe we can make our living just by taking in each other’s washing for the foreseeable future. The obvious fact is that New Zealand companies will have to bulk up and internationalise to succeed, or we cannot increase our productivity levels within this country.

The second thing is that if companies succeed in either having some manufacturing capacity offshore or investment offshore or having very substantial parts of their business dependent upon exporting so that the majority of their income comes from offshore activity, then our current taxation system, with its lack of an active exemption, encourages those companies to move all capacity offshore, including head office, including design, and including back-office functions. That is the choice that developed economies—particularly, small developed economies such as New Zealand—face. Are we to play a long defensive game, trying to keep what little we have, instead of trying to expand and develop, to develop those international connections, and to retain the highest-quality, highest-paying, highest-value parts of the production system within New Zealand?

If we opt for the “little New Zealand” policy we will, in the end, defeat ourselves. We will, in the end, have a declining economy, not an expanding economy. If we opt for an outward-looking approach, which requires an active exemption, then there is a very real prospect that we will be more capable of succeeding economically than we have done over the last 40 or 50 years. That is the choice that a small, isolated economy in the south-west of the Pacific faces. We cannot succeed by trying to mimic the economic patterns of behaviour of the low-income, mass production countries in Asia. If we think that that is the route to success, then we have really got things profoundly wrong.

When New Zealand introduced, under the previous National Government, the current tax rules taxing New Zealand companies on their worldwide income, it was theoretical perfection. To take Dr Lockwood Smith’s point, it has lower compliance costs, because not having an active/passive distinction by itself, obviously, has lower compliance costs. But the reality is that the lower compliance cost is bought at the expense, in the end, of poorer economic performance. Once we have an active/passive distinction of any form, then, first of all, that in itself increases compliance costs. But, secondly, to buttress New Zealand’s tax base so as to not lose all that taxable income—

Dr the Hon Lockwood Smith: That’s right—you can’t afford to let it go.

Hon Dr MICHAEL CULLEN: That is right—precisely! If we want all our taxable income to move offshore so that there is no tax within New Zealand, then we do not need buttressing rules around it. Those buttressing rules create compliance costs. The member cannot have it both ways—or maybe he can; I do not know. But he needs to understand that the point about doing this is that it creates a risk. It creates the risk that we lose the tax base offshore, and that also will not be helpful for New Zealand. That cannot help New Zealand’s future in terms of its need for money for investment in infrastructure, skills, and so on and so forth.

That is the most important part of this bill. It is by sheer coincidence that that part of this bill comes in on the same day as the Committee stage of the New Zealand-China Free Trade Agreement Bill. But the two bills, in fact, have a great deal of interrelationship in terms of the underlying philosophy about having an outward-looking, growing New Zealand economy, as opposed to an inward-looking, gradually retreating, and declining New Zealand economy.

The second main part of this bill is the insurance changes. The member should support those, because, at the end of the day, the changes here merely align the rules around the taxation of insurance with those of general companies and other financial sector parts of the economy. Yes, we know that Sovereign objects to this, and we know that a former member of the National Party has been lobbying on behalf of Sovereign. But, in fact, there has been a great deal of consultation with the insurance industry as a whole, and the bulk of the insurance industry is actually reasonably happy with this—nobody is ever happy unless we simply cut their tax.

Any change will always have some degree of opposition to it, but there are long transitional provisions within this bill that protect. This particular part of the legislation is not revenue-positive for quite a large number of years to come; in fact, it is actually revenue-negative for some considerable number of years to come. But it is an important change, because it leads to a fairer taxation system around insurance and it removes the bias against life insurance in favour of term insurance, which the current taxation system provides. The taxation system should be neutral between those two options. It should not be determining a choice between those two options. The choice should be based purely upon people’s own economic and social needs in respect of term insurance versus life insurance.

Much of the rest of this bill consists of a vast range of technical changes. For those who want to get really excited, there are retrospective provisions that go back to 1986, and, to get even more excited, those provisions relate to the Parliamentary Service. In other words, the Inland Revenue Department has caught up with a problem in the law that has remained unamended for 22 years and that should have been amended, and now it is deemed to apply from, I think, 1 April 1986, or from whenever the Parliamentary Service came into operation.

The other main feature of the bill is significant reductions in compliance costs in terms of thresholds for a whole range of aspects of the tax system as they apply to small to medium sized enterprises. One could always argue that those reductions should go further. Indeed, we looked at other options that had more significant revenue costs attached to them, but these do have quite significant revenue costs.

This is not a bill that increases the Government’s tax revenue, at all. It reduces the Government’s tax revenue both in the short term and in the long term. A reduction in active exemption obviously reduces the Government’s tax revenue. The compliance cost changes around thresholds reduces the Government’s tax revenue. The life insurance changes reduce the Government’s tax revenue over the next few years.

This is well-thought-out legislation. It is large, and it is complex. The select committee will need to spend a lot of time on this legislation, and I am sure it will find reasons for changing some of its details. But let us not pretend that a tax system should not have integrity that protects the tax base of New Zealand but simply resigns all tax to offshore jurisdictions—tax rationality does not say that; that is just pure right-wing ideology. That is not a rational tax system; that is a very silly tax system.

TIM GROSER (National) : I do not think I can afford to fall back on the new MP excuse after 2½ years here. Nevertheless, I have to admit to finding it rather daunting to be given a 600-page document that includes explanatory information containing issues of vast complexity in which I have no professional background, and then to be expected to make a serious contribution on it. However, there are one or two things in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill—that National members support being referred to the select committee for a first reading—that do some sensible things, and merit some comment. I will focus on those issues, which are very much related to the challenge of globalisation that is facing New Zealand.

I acknowledge that the bill is a multi-faceted bill, and that it simplifies a number of tax thresholds. It helps the voluntary sector in terms of the mechanisms used to make contributions to charities. That is a strong position of the National Party; we were not surprised when it was taken over by the Government, but it is the right direction from our point of view. I wish to focus, in a few brief comments, on one or two of the moves the bill makes in terms of coming to terms with the integration of the New Zealand economy, from a tax perspective, into the global economy.

I recognise that some of the terminology is formidable. Until 2½ years ago I thought CFCs were a particularly potent form of greenhouse gas; I now understand that this acronym refers to controlled foreign companies. I have to admit that one day while driving in Auckland and listening to talkback, I heard the announcer say: “After the break we’re coming back to a huge argument that’s erupted over the rules for pies.” I thought I might have to rethink my thinking on talkback radio, because I had not realised that listeners would be interested in portfolio investment entities. Unfortunately, my pleasure was very short-lived when I found they were actually objecting to the fact that the winner of the New Zealand 2007 pie contest had produced a vegetarian pie, which in the opinion of many of the listeners was something akin to the end of civilisation as we know it.

Craig Foss: It was from Hawke’s Bay, that pie.

TIM GROSER: I am well aware of that, and I am sure it was an excellent pie, but I have to tell the member the decision was deeply controversial in Auckland, however popular it was in the bay.

The challenge facing New Zealand to adjust its thinking and its policy structures to globalisation is truly formidable. I am sure that this bill takes us in a certain direction, I am sure that it is a work in progress, and I am certain that further pieces of legislation will be required, as we all adjust our ways of thinking, our behaviour, and our legislation to the fact that we no longer live in a closed economy. I remember a speech that Bill Clinton made in his first presidency—a brilliant Clinton speech—about how even in his lifetime he had gone from seeing a local economy in Arkansas to seeing the shops and services that he had grown up with start to trade more and more with other American states, and then move into an international economy. So the most sophisticated country in the world, the United States, has gone through this process; we are going through this process. In that respect, I agree with the comments that Dr Cullen has made—that there is a close linkage between this bill that we are considering for the first time and the very extensive discussion we have just had on the China free-trade area. There is a close relationship—and a need to have some coherence in our country—between the trade and the investment sides of the equation.

We have just spent a fair bit of time in this House on the trade side, so let me reflect on the challenge facing us on the investment side. I first became aware, in a personal sense, of how poorly New Zealand performs on the investment side—I am talking about outward investment here—when I read a monograph written by none other than Alan Bollard, actually, when he was with the New Zealand Institute of Economic Research. He chronicled the history of New Zealand attempts to invest successfully outside New Zealand. It does not make pretty reading. I know there are some highly commendable exceptions to that, so far be it from me or any member to criticise the pioneers who got out there and, frankly, made efforts that did not always quite succeed.

But the fundamental point is this: New Zealand is a poor investor overseas. That is a fundamental problem facing New Zealand. Although I suspect that the key to it lies within the corporate culture of this country and not the Government, it nevertheless is incumbent upon the Government to make sure that the policy framework we have in place does not get in the way of successful investment. I think, in that respect, it is very clear that some aspects of our external tax regime have done precisely that—put in place perverse incentives, sometimes in the name of what sounds like good policy, such as tax neutrality. But at the end of the day they simply do not aid corporate New Zealand in the task of coming to grips with its challenge to integrate its own operations, not just in terms of the trading of physical goods and physical services but also in terms of its own investment operations.

In case any members are thinking that this is some minor technical point I am making, let me just throw some numbers around. It is a bit of an exaggeration, but we can say that New Zealand does not have a trade problem in the sense of the current account deficit; New Zealand actually has an investment problem. I think that is overstating it, for the very reasons we have just debated in the context of the China free-trade agreement. Actually, New Zealand is not performing in line with other small, developed countries, on the trade side, and there is an enormous amount we must do. Nevertheless, the point that I think the metaphor makes—which I have heard in a number of contexts; it is not mine—has an essential truth in it.

If we analyse our current account deficit, we can see that the trade account is not in too bad a shape, but it is completely overwhelmed by a massive deficit in investment income. We measure the stock of accumulated foreign investment in our country vis-à-vis the stock of investment of New Zealand - controlled foreign companies—and I agree with Dr Cullen that the term itself suggests some appalling multinational corporation from Detroit, but actually it may mean a Kiwi company from Hawke’s Bay operating somewhere in Australia or Singapore, and these are companies we all very much wish to support—through a measure called the “IIP”, or the international investment position, which accumulates the stock of our investments in other countries vis-à-vis the stock of foreigners’ investments in New Zealand.

We have two fundamental problems. The first is the relative size of those two stocks of investment. Broadly speaking, from memory, we have something like $110 billion of assets overseas versus I think about $250 billion of assets in our country owned by foreigners, indicating an unwillingness by New Zealanders such as myself to live on a more straitened income than we might otherwise have done, so we have accessed foreigners’ savings to meet our investment needs. But this has generated a stock of investment flow that is grossly imbalanced. Worse still, the average rate of return on the stock of New Zealand investments by our controlled foreign companies is immeasurably lower, on average, than the rate of return of foreigners’ investments in our own country. If we add those two lethal elements together we have a major national problem on our hands, whereby, even though we continue to perform at least credibly on the trade front, we are bleeding on the investment account.

So we have, if you like, this fundamental challenge facing New Zealand, which is to lift our game on foreign direct investment in other countries. It is vital that we do not just take a tax minimisation account on that, but that we look at it strategically. I refer to some of the changes that are suggested in terms of the treatment of active income. The Hon Peter Dunne indicated the way in which the definitions will apply. It is the reciprocal of passive investment. I think there are some interesting starts, and I am sure that in the process of this bill being taken to the select committee we will have a lot of evidence that will need to be sifted through very carefully indeed.

SUE BRADFORD (Green) : Although there are some aspects of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill with which Green Party members have no problem, including those dealing with the voluntary sector—at least as far as I can identify those aspects at this stage—we are horrified by proposed changes affecting the offshore taxation regime for New Zealand companies. We will oppose these moves and vote against the bill every step of the way.

In exempting from tax active income earned offshore by a company where a New Zealand resident has the controlling interest, this bill is a charter for exporting jobs and closing down our manufacturing sector. The Government is acting as if the shape of the future is one in which we are nothing more than a head office and design centre for enterprises likely to be based mainly in Asia, but based in other parts of the world as well. It is insanity that at a time when the impacts of climate change, peak oil, and an incipient global recession are beginning to kick in, our Parliament should be considering legislation that provides serious tax incentives to companies to take their production offshore.

I thought it was bad enough when I heard stories in years gone by such as, for example, that of the Swazi Apparel clothing company in Levin, which was told by the Ministry of Economic Development officials that it would be best advised to shift its operations to China. It did not matter that this would mean the loss of around 90 jobs, with the resulting impact on the local economy, not to mention the workers involved. I thought it was even worse when some members of the Labour Government tried to tell us that Buy Kiwi Made should be not only about companies that make things in this country, but also about businesses like Icebreaker, which had made the decision to take its production offshore. But the bill in front of us tonight really takes the cake. It seems to be driven by a belief that we should actually incentivise people to close down their operations here, and that there is no future for manufacturing in New Zealand.

What a disaster. What a disaster after all the money, work, and commitment that have gone into the Buy Kiwi Made programme on the part of manufacturers, Business New Zealand, retailers, unions, and the Ministry of Economic Development. What a disaster after all the cross-sectoral goodwill and work that went into the long-running Manufacturing Plus project. Why on earth does Labour want to motivate manufacturers to self-destruct in this way? Was the manufacturing advisory group that came out of Manufacturing Plus happy with these new tax proposals—that is, if it still exists? The justification given is, in part, based upon fostering so-called economic transformation. Transformation to what? Being a colony of Australia, South-east Asia, and China, perhaps? Having an economy totally dependent on foreign imports, the price of which will keep going up as the price of freight increases exponentially alongside the price of fuel?

Treasury argues that the current rules create an incentive for companies to move completely offshore—head office and all, as Dr Cullen was saying earlier—and that the point of the new rules will be to allow head offices to stay here while the manufacturing part of the business goes elsewhere. Reducing the tax costs for firms looking to expand offshore will, it appears to argue, make us more competitive and more compatible with the globalised market—above all, with Australia. Behind this argument sits the underlying assumption that we should not even bother manufacturing here, because we cannot compete. It would appear that it is time for us to internationalise and globalise our jobs and our businesses out of business, apart from a few head office staff in Auckland or Wellington. Treasury also argues that the new tax exemption will make New Zealand more attractive for foreign investment, and that the fact that headquarters will stay here will create work for headquarters-type people.

Even more bizarre is the fact that if the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill goes through, companies manufacturing in New Zealand will still be taxed, while those offshore will not. So our loyal local companies will in fact be at even more of a disadvantage comparatively—as if the high dollar was not enough to contend with! The madness of all this takes me back to the early 1990s, a time many of us—including some National MPs, I suspect—might prefer to forget. That was a time when, for example, the then Minister of Finance, Ruth Richardson, took pride in hosting a conference in Auckland aimed at marketing what was left of our assets to overseas companies. That era also saw the final sell-off of rail by Jim Bolger, one of the biggest ever rip-offs of New Zealand taxpayers by a foreign company.

I do not understand Dr Cullen. On the one hand he and his Government have done a great thing by buying back and reinvesting in rail, and biting the bullet on the cost, because Labour does appear to understand on one level that climate change and peak oil mean we must rebuild our national passenger and freight infrastructure. On the other hand—and simultaneously—he is presiding over the incongruous aberration before us tonight aimed, it seems, at undermining any desire of New Zealand manufacturers to keep making things here. For a member of a party that—as Dr Cullen proudly told this House recently in response to one of my questions on employment issues—is the party of workers, it is odd in the extreme that he does not appear to care a fig for the hundreds of thousands of jobs that may well disappear as a result of the tax incentives contained in this bill. Where does he think the jobs to replace those lost will come from?

I find it odd that once again I find myself giving Dr Cullen history lessons. Does he not remember what happened when his own Government stripped out our manufacturing base in the 1980s? Can he not remember the acres of empty factories and industrial zones, or what happened when tens of thousands of people in the cities and towns ended up jobless? Some people—and, above all, tangata whenua and Pacific peoples—are still reaping the consequences of those policies of the 1980s, in places like South Auckland, Northland, Tai Rāwhiti, and the Bay of Plenty

What the Government is proposing will give Icebreaker a tax cut for making lovely outdoor wear in China, but not Earth Sea Sky for making lovely outdoor wear in Christchurch. Norsewear—that formerly iconic brand—will reap a financial benefit for having taken its jobs to Asia, while Swazi Apparel, staunchly staying local, will miss out. The bill will give tax cuts to large firms that send fish to China for filleting and packing, but not to small-time fishermen who process locally and who create environmental and social benefits by not carting fish back and forth across the planet. The bill will give Fisher and Paykel a tax cut for the whiteware it makes in Mexico, but not for the whiteware it makes in Auckland.

To all those companies, business organisations, and trade unions that have been involved in Manufacturing Plus, the Buy New Zealand Made campaign, and Buy Kiwi Made, I call on them to join the Green Party—and any other parties who oppose this madness—to help persuade Labour to change its mind on this one. Globalisation does not have to be about giving up on our manufacturing sector. We simply cannot afford to lose our ability to make things here, either for local use or for export. Nor can we risk losing tens—if not hundreds—of thousands of jobs at a time of increasing global, economic, and environmental insecurity.

The other aspect of the bill that I feel constrained to address briefly tonight is that dealing with petroleum mining. The first aspect is that the bill prevents petroleum companies from deducting overseas expenses from their New Zealand income, and thus ensures that New Zealand will get the tax benefit of mining here, rather than having the profit hidden behind expenses incurred overseas. That is fine with the Greens. However, looking beyond this, the bill will also remove disincentives that may affect investment in oil and gas exploration and development in New Zealand, adding up to a huge tax cut over 4 years in the petroleum industry.

The Green Party really questions why we are giving major tax cuts to these companies at a time when even those who would not normally follow the oil markets can see the massive profits being made. The bill somewhat disingenuously describes these changes—for example, allowing development costs to be amortised over the life of the mine, and repealing the current distinction between onshore and offshore development—as being necessary to safeguard tax revenue. However, in reality what the changes mean is less, not more, tax income from petroleum mining. Secondly, through these measures the Government is manifestly encouraging more mine exploration and development, with apparently no regard for the environmental and climate change consequences.

The parts of this huge bill that deal with manufacturing and the tax cuts for petroleum mining are sufficiently outrageous that, from our point of view, they totally negate the other beneficial changes that are being promoted. The Green Party will therefore do everything we can to oppose the bill and to warn people of the danger it poses to our economy, our workers, and our environment.

CRAIG FOSS (National—Tukituki) : As my colleague Dr Lockwood Smith said previously, National will be voting for this bill to head to the Finance and Expenditure Committee—with some trepidation. But on the whole, it is a very good, positive move in the right direction, notwithstanding some of the interesting interpretations the Minister of Finance made of his lack of action over the last 9 years, trying to pretend they did not exist.

But one thing was missing from the speeches earlier of both the Minister of Revenue and the Minister of Finance that I fully expected to be part of this bill. There are about 130-odd pages of explanatory note and 450-odd pages of detail, but there is no summation of the fiscal numbers here. This goes from changes to charities, changes to the controlled foreign company rules, the active and passive income rules, the petroleum mining rules, etc., but putting all that aside for a moment, there are some huge implications here. The Minister of Finance particularly made note, and tried to convince us, that tax revenue would actually go down as a result of this bill. Perhaps it will; perhaps it will not. We would like to see the numbers.

I have had a quick discussion with the Minister of Revenue’s officials and I believe that those numbers will be forthcoming tomorrow. So that will be beneficial, particularly with such a wide-ranging bill because we will need to pick it apart as it goes through the Finance and Expenditure Committee. I understand from the various discussion papers that this bill is formed from that there have been individual summations for costings, etc., but it would have been good to hear that in the Minister’s introductory speech. I look forward to hearing about that tomorrow.

I look forward to this bill going to the Finance and Expenditure Committee and I am certainly looking forward to the expertise around the table from the officials. I have read parts of the bill quite a few times and I freely and openly admit that I still cannot work out parts of it, but I enjoyed the Minister’s earlier speech and the stuff about the various changes to “term insurance” and “life insurance”. I need to sit down and read some of those technical changes, and digest them over a nice Hawke’s Bay red wine.

There is a good point about this bill: it seems to follow a good and solid process. There has been a discussion document and representation from various expert groups prior to its getting to this stage. We are talking about it here and it will ease into the select committee process as we go through the end of this parliamentary session, unlike the changes to KiwiSaver part 1 and part 2, the fair dividend rate changes, and, goodness gracious, the Climate Change (Emissions Trading and Renewable Preference) Bill that has roared through the Finance and Expenditure Committee without good, fair, and transparent submissions, consultation, etc. We are reaping the reward for that because we are bound to see some more Supplementary Order Papers on those measures. In fact this bill, deep down, includes amendments to some of the fair dividend rate changes and even the KiwiSaver changes, and if the Government had taken a bit more time on those, consulted a bit more widely, and not looked at the electoral clock but instead looked at a good and solid procedural clock, then perhaps the bill would be a few pages thinner.

The bill forms a bit of a suite of bills, and I am surprised that the other two Ministers did not mention that, because there is some good, solid, cross-party support for most of the other bills—the Reserve Bank of New Zealand Bill (No 3), the Financial Advisers Bill, and the Financial Service Providers (Registration and Dispute Resolution) Bill.

• Debate interrupted.