Interconnections, Japan / New Zealand trade

Teacher note

• More than a small and minor part?
• Aluminum, a social decision-making case study

When the Prime Ministers of New Zealand and Japan met in 2005 they recognised the “long standing trade and investment links, as well as the complementary nature of the two countries' economies”.

New Zealand PM Helen Clark and the then Japanese PM Junichi Koizumi, who was succeeded in 2006 by Shinzo Abe, said together “the Governments of Japan and New Zealand will take a forward-looking and fresh look at the present bilateral economic relationship and consider ways to strengthen this relationship”. Clearly both countries feel they can benefit from trade with the other.

The Kansai is the powerehouse which produces a very large proprtion of the Japanese products that New Zealders have been and are today keen to purchase. Kansai is also one of New Zealand’s important markets.

Japan and New Zealand have fostered close relations. In particular, both governments have encouraged what they recently called a ‘New Level of Engagement’. This interconection promotes science and technology, tourism, forestry, education, people-to-people exchanges and trade and investment between the two countries.

The goods in our shops, the gadgets in our houses and the people around us provide plenty of evidence Japanese and New Zealand economies are interconnected by trade. Sometimes our leaders push things along where there seems new opportunity to do things better together. For example, both countries welcomed the signing of the memorandum on 1 June 2005 between the Japan Society for the Promotion of Science (JSPS) and the Ministry of Research, Science and Technology of New Zealand to promote co-operation in research and development. New Zealand thinks such an opportunity is important as part of its strategy to promote growth and innovation.

Other interconnections can help strengthen the economic relationship, as our Trade Minister, Phil Goff, told the Japanese media he wanted, when in Tokyo in 2006.

Both governments will strengthen high-level exchanges, including those between the Prime Ministers.

Take a look around to see what is made in Japan. Think about basic features of Japan’s economy, and it becomes easy to see how important Kansai – Japan’s economic powerhouse - is for Kiwis.

More than a small and minor part?

Some of the 850 Kiwis resident in Kansai would like New Zealand to do what it does better, and to work together more in building useful interconnections. Jason Allen, strengthened by his experience as a former Sakai City coordinator of International Relations says New Zealand products play a small and minor part in the local markets.

“We need first some consolidation. Some top tier structure under which smaller players can all know they have the security and bounce off it” says Jason Allen.

Japan is New Zealand's third biggest trading partner after Australia and the United States.

In the top ten New Zealand exports to Japan between 2004-2006 four increased and six decreased. Aluminum, cheese, casein and sheepmeat exports to Japan increased. Fresh fruit, frozen beef, fibreboard, logs, woodpulp and plywood diminished. Eight of the second ten exports diminished – only chilled beef increased. These top 20 exports represented 70% of NZ exports to Japan – total provisional exports in 2006 were worth nearly $NZ3.5 billion.

Unwrought aluminum exports were worth nearly $NZ700 million – up 24% in 2006.

That’s more than tourism, estimated as worth $NZ620 million annually, which, as with education, recently worth $NZ200 million annually, has started to slip as a revenue source.

Coal and ironsands have also been big exports - and all went to Kansai.

Motor vehicles were New Zealand’s single biggest import from Japan, worth $NZ1.5 billion out of $NZ4 billion total Kiwi imports from Japan. Trucks, vans, petroleum, bulldozers, transmission apparatus, television receivers, new rubber tyres, photocopying apparatus and motor cycles made up the rest of the top ten imports. Half the top 20 imports grew, half declined.

Economic partnerships that built on past investments, or involved new ones in the Japan New Zealand relationship could enhance New Zealand’s national development. However, some of the options involve hard choices – sound research and appropriate decision-making.

Aluminum, a social decision-making case study

What decisions might New Zealand make about the aluminum smelter, the site in Southland from which New Zealand’s biggest export goes to Japan?

New Zealand secondary school students of social studies are encouraged to learn about social decision-making. The background, the choices and the questions that will come up for New Zealanders make aluminum a useful case study for learning about social decision-making. A balanced understanding of the aluminum issue will also help current and future citizens handle an important issue.

What choices are there?
A New Zealand State Owned Enterprise, Meridian Energy, could continue to sell hydro energy to the consortium that operates the New Zealand Aluminum Smelter. http://www.meridianenergy.co.nz/AboutUs/Reports/default.htm?report=1

The aluminum business could continue, providing work and income locally, earn foreign exchange, pay taxes, supply raw material for local industries – such as building - that add value to aluminum and remain a strong part of the Japan New Zealand relationship.

Alternatively, a New Zealand Government could insist that the hydro energy be used for other purposes.

The hydro power, a renewable energy, could be used to meet the needs of New Zealand consumers – perhaps in Auckland if the transmission lines were sufficiently developed - and reduce use of other, environmentally challenging energy.

What is the background?
New Zealand put a lot of effort over a generation into attracting and retaining investment from Japan for big projects such as the Bluff aluminum smelter, and a lot of effort and debate into organizing the power generated at Lake Manapouri to meet general New Zealand and smelter needs.

Unwrought aluminum exports were worth nearly $700 million in 2006 – New Zealand’s single biggest export to Japan. Aluminum represented 3.5 % of New Zealand exports in 2006 – worth $1.1 billion worldwide.

The issues involved in converting Australian bauxite to aluminum with New Zealand hydro power have been and will be important.
Comalco, the biggest international investor in the smelter - is the largest consumer of electricity in New Zealand, and the biggest client for the New Zealand state owned enterprise, Meridian Energy.

The aluminium melter was established in 1971 at Tiwai Point, Bluff, with investments from Comalco, and Japanese companies Showa Denka and Sumitomo Chemicals.

Aluminium has many uses. Meridian Energy’s 2006 annual report says the Bluff aluminium produces the world’s purest aluminium, valued by Japan’s electronics industries for data storage memory disks and electrical capacitors. New Zealand aluminium ends up in mobile phones, computers and the aerospace industry the world over.

“It is an export success story for New Zealand” Meridian Energy’s 2006 annual report said.

In 1993 then Prime Minister Jim Bolger, at a Comalco smelter upgrade function, said “The Comalco experience is a story from which the whole country can take heart. You've proved your worth over a quarter of a century in New Zealand” The then new $465 million investment the Japanese companies helped make “reflects how important the smelter is to Southland and to the New Zealand economy” Prime Minister Bolger said.

The successful renegotiation of the power agreements was “essentially bringing forward decisions that were pending for the near future. Until those agreements were sorted out, there was bound to be uncertainty and wariness among investors about spending a lot of money”.

That Prime Minister knew the community saw alternative uses for the renewable energy that made the aluminum – and spoke of a debate that can reopen. “To me the issue is clear cut. Does New Zealand have the confidence to be part of a global world economy or do we want to withdraw to fortress New Zealand?”

Jim Bolger said “A symbol of the extent to which New Zealand industry is linked to the global economy is Comalco. Here is a plant that uses renewable energy from New Zealand and raw materials from Australia and other parts of the world to supply markets across the globe. In the process, it generates jobs for hundreds of New Zealanders and makes a very substantial contribution to the economy of Invercargill, Southland and New Zealand.”

“In the present political climate with many parties seeking a place in the political sun it was totally predictable that an attack would be made on foreign investment. The arguments are spurious. It is clearly in New Zealand's interest if investors wish to invest their savings in New Zealand, to create jobs and opportunities in New Zealand. Up to one third of working New Zealanders rely on jobs created directly or indirectly by foreign investment” PM Bolger then said.
http://www.executive.govt.nz/93-96/minister/pm/pms310596.htm

In 2003 officials reflected the debate about use of the renewable energy for manufacturing when they said in a report on public policy considerations on providing special arrangements for the Comalco contracts “any special provisions should not seek to restrict future decisions by government”.

The main parties to the Comalco contracts for electricity supply to Tiwai Point, namely Comalco, Meridian and Transpower, had argued strongly that the Comalco contracts should be "ring-fenced" or exempted from the 2003 proposed electricity generation regulations.

Other parties, including Genesis, Contact and Mighty River Power, had either opposed any exemption or argued that any special provisions should be limited. http://www.med.govt.nz/templates/Page____8886.aspx

Comalco was the original reason that a campaign against foreign investment in New Zealand (CAFINZ) began. Thirty years after its foundation, CAFINZ said in 2003 "the company and its Tiwai Point aluminum smelter, near Bluff remains just as obnoxious all these decades later. This year there was yet another "power crisis" CAFINZ organizer Murray Horton said.

The campaigners put out a press release entitled "A Simple Solution To The Power Crisis: Pull The Plug On Comalco & Close The Bluff Smelter". It concluded: "Last time there was a crisis the Government paid the company to close one potline at the smelter. We suggest that they go the whole hog and close the place down. Obviously there would be some job losses but the Government could justify it as being in the national interest”.

Murray Horton said Comalco has “been draining 15% of our national grid for more than 30 years. (Shutting it down) would free up a huge block of electricity to be used much more productively than subsidizing one of the world’s biggest transnational corporations".

http://www.converge.org.nz/watchdog/03/08.htm

Geoff Bertram, a Victoria University of Wellington economist wrote in Tera Nova, April 1991 that smelting aluminum in Bluff with Manapouri power yields large profits. In principle, therefore, there was always the basis for a mutually-beneficial deal between a smelter and New Zealand. In practice, New Zealand taxpayers carried most of the costs and risks of establishing the industry in the 1960s, but since 1971 the smelter’s owners have laid claim to the lion’s share of the profits. It is this uneven distribution of costs and benefits between the smelter and its host nation that led successive Governments to seek to change the terms of the electricity contracts.”

Geoff Bertram wrote that “For decades the company (Comalco) fought to keep secret both its tax payments (effectively nil until the mid 1980s) and the price it paid for its power (less than one third of the standard wholesale price initially, rising to about half in the 1980s as a result of some tough bargaining by the Muldoon government).”

Greenpeace said in 2007 New Zealand should adopt a legally binding renewable energy target of 100% renewable energy by 2025. Its “New Zealand Energy Revolution – How to prevent climate change” report does not focus on New Zealand’s aluminum smelter – but the “energy revolution” poses questions about how future generations might use the country’s renewable hydro energy.

The government consults on its climate change and energy policies. Governments recognise that clear signals on such issues are important for business certainty.

So what might New Zealand do in future with the hydro energy it currently sells to make aluminum made possible by Japanese investment, and made profitable by the Japanese market? Are there real choices, or are calls such as a Campaign Against Foreign Investment makes for closing down the smelter inappropriate?

In “Comalco: the first ten years”, ISSN0110-9413, Bertram and Dann wrote “the secrecy which surrounds virtually every aspect of the Bluff smelter’s operations is extra-ordinary as well as ineffective”.

The next generation, current and future governments might want to make different decisions as contract renegotiations are held about New Zealand Aluminum Smelters.

New Zealanders might ask what they get as home energy consumers, as employers and employees, as tax payers and as citizens from the current or alternative aluminum contracts – or other uses, including those Greenpeace, and the Government’s Energy strategy, suggest.

Young New Zealanders might like to start now to research the alternative uses of the nation’s hydro power – the question will come up time and again during their lives. Meridian Energy said in 2006 existing Comalco contracts end in 2012, and that renegotiations were proceeding. The current negotiations have made good progress to this point. The outcomes of current negotiations on contract renewal are of major significance to the energy sector, said Meridian.

There would be implications – worth anticipating - for the Japan New Zealand relationship if the hydro energy contract ended. New Zealanders can rationally consider alternative uses for renewable energy that it has already invested in – and might expand.

Key issues in New Zealand’s national development have often been key issues in the Japan New Zealand relationship - and continue to be so. Aluminum is but one of the issues some may want considered in a “forward-looking and fresh look” into the bilateral relationship.

From Anthony Haas, Asia Pacific Economic News service

18 March, 2007

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