European Union raises PGF concerns with NZ

Shane Jones’ efforts to boost the regions through the Provincial Growth Fund have caught the eye of the European Union - and trade officials have warned that more scrutiny will follow.

Shane Jones has styled himself as “the lion of the regions” - but could his billion-dollar fund for the provinces end up becoming a sacrificial lamb to secure a trade deal with the European Union?

While the Regional Development Minister may not countenance a taiaha being taken to the Provincial Growth Fund (PGF), his Government’s controversial proposal to grant a $10 million loan to the Westland Cooperative against Treasury advice has led to the EU asking whether New Zealand is adhering to its international trade obligations.

While the loan was ultimately called off after Westland announced plans for its sale to Chinese dairy company Yili, the initial announcement and resulting media coverage clearly raised concerns abroad.

In a formal written question to New Zealand ahead of a Geneva meeting of the World Trade Organisation (WTO) agriculture committee in late February, the EU asked how the country would notify the Westland loan to the WTO.

It also asked for an explanation of the PGF, including how much money was going to agricultural projects and the dairy sector, as well as whether New Zealand was shifting away from its policy of not granting government support to those industries.

Jones has previously dismissed fears his fund’s work would qualify as agricultural subsidies, telling Parliament he had received advice from the Ministry of Foreign Affairs and Trade (MFAT) but was “not bothered” by the WTO given its state of disarray.

Shane Jones has previously dismissed concerns about whether the Provincial Growth Fund may breach WTO requirements, but foreign affairs officials seem slightly more worried. Photo: Lynn Grieveson.

However, in a briefing to ministers ahead of the WTO meeting, MFAT’s deputy secretary for trade and economic issues Vangelis Vitalis warned ministers about the “potential implications of scrutiny” from the EU and others.

Vitalis said New Zealand had regularly asked questions of the EU about the agricultural subsidies it provided and whether they were consistent with its WTO obligations.

As part of the so-called Cairns Group of agricultural exporting nations, New Zealand had been at the forefront of efforts to secure tighter WTO rules on agricultural subsidies which distorted trade and production.

While it was routine for WTO members to ask each other about the support provided to their agriculture sectors, Vitalis said it was “unusual for New Zealand itself to be questioned about [the topic]”.

The EU’s question seemed an attempt to suggest that New Zealand should notify the WTO it was providing trade- and production-distorting agriculture subsidies for the first time - a move which would “signal a fundamental change to our long-standing approach of seeking tighter WTO disciplines on the use of such subsidies”.

The fact that the Westland loan would be given a public airing in front of all WTO members was likely to lead to “intensified and ongoing scrutiny of the PGF”, an MFAT official said.

While New Zealand was allowed to spend up to $288 million on distortionary domestic subsidies in what are called “Amber Box payments”, the country had historically avoided doing so on the grounds that it would undermine the push to eliminate agricultural subsidies which “severely disadvantaged” Kiwi exporters.

“The benefits to New Zealand’s exporters of securing limits on the extent to which other countries can use such subsidies would far outweigh the value of using New Zealand’s Amber Box entitlement,” Vitalis said.

In its official response to the EU, New Zealand argued that the Westland loan would not distort trade or production, as it would have been repayable on commercial terms and did not benefit specific producers.

It said PGF grants were not pre-allocated to specific sectors or certain businesses, while no money had been set aside in the fund for either dairy producers or the wider agricultural sector.

While the response was “factually accurate” according to Vitalis, he said the fact that the loan would be given a public airing in front of all WTO members was likely to lead to “intensified and ongoing scrutiny of the PGF”.

“Any perception that New Zealand may be using its Amber Box provisions can be expected to generate significant interest from other WTO members on all sides of the debate about the use of trade- and production-distorting agricultural subsidies.”

National trade spokesman Todd McClay says the PGF may be to blame if New Zealand gets a bad free trade deal with the EU. Photo: Lynn Grieveson.

National trade spokesman Todd McClay told Newsroom it was concerning that New Zealand had been forced to defend the PGF at the WTO due to uncertainty over government criteria for the fund.

“It means that the EU views Shane Jones’ reckless attitude to spending taxpayer money as a form of subsidy to agricultural production. You cannot give soft loans to your mates without consequences.”

McClay said it was likely the EU would raise the PGF again during negotiations with New Zealand for a free trade agreement, and a bad deal for dairy and meat access could be “laid squarely at the Government and Shane Jones’ feet”.

“Trade negotiations are a little bit like a game of chess: each side looks for the absolute advantage for their own position, and if you look at where the pressure that comes on EU governments it’s for greater protection and less access for countries like New Zealand.”

An MFAT spokesperson said the ministry was unconcerned by the EU’s interest in the PGF and remained confident in its response.

While the EU appeared satisfied with the answer it received, New Zealand was “fully prepared” to answer any more questions from it or other WTO members in the future.

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