Free Trade Agreements not all they’re cracked up to be

There are two views about free trade agreements (FTAs) – they’re either unreservedly positive for New Zealand’s exports, because all other countries have higher tariffs than we do, or they’re full of potential fish hooks. These opposing views can’t both be right, but on closer examination there are elements of truth to them both.

Our enthusiasm for FTAs stems from our desire, not to mention need, to sell agricultural commodities to the world’s largest and fastest growing economies, hence the amount of effort devoted to negotiating agreements with China, already achieved, Russia, India, Japan and South Korea, as well as the Trans Pacific Partnership Agreement (TPPA) which the USA intends to join. The government ministry jokingly referred to as the Ministry of Trade and Fonterra is especially keen to see FTAs agreed with all these countries, because improving access, particularly for dairy, meat and horticultural products, gives New Zealand the biggest bang for its trade buck.

Unfortunately FTAs are a double edged sword – while agricultural trade invariably benefits from better access, domestic manufacturers inevitably suffer increased competition from, in many cases, lower cost competitors. This of course leads to a chorus of commentators suggesting our local manufacturers must get away from low value added products and move progressively into high technology goods. The problem is of course the transition period which results in factory closures and loss of employment in the short term.

There is also a contrary view from the World Trade Organisation (WTO) which would like to see more all-encompassing free trade agreements reached instead of a whole series of smaller regional agreements that in theory set up tariff barriers around them and make it harder to achieve agreement at WTO trade negotiations.

There appear to be enormous potential benefits from agreeing FTAs with economic powerhouses like India, Russia, Korea and Japan, although Russia isn’t even a member of the WTO and it ranks 154th on Transparency International’s corruption perception index. This suggests our enthusiasm for trade deals should also be tempered by caution about investor protection and intellectual property rights. The FTA with China has already produced benefits for exporters, but imports from China far outnumber exports because of China’s undervalued exchange rate, while the track record on these other issues still leaves plenty to be desired.

The eagerness to get the USA to join the TPPA raises a whole host of questions about the likelihood of achieving a good deal, as opposed to a bad one. No Ordinary Deal, a book containing contributions from 19 experts from NZ, Australia, USA and Chile, explores all the reasons they believe it’s a bad deal for New Zealand in spite of the dream of better dairy access. They make the point trade deal is a misnomer, because it’s really about domestic government policy areas like food standards, property law, financial regulations and central procurement, not imports and exports. If the USA were to join the TPPA, the experts argue it would be even more unlikely to follow conventional FTAs because of recent changes in Congress and the Senate to a more protectionist composition.

Australian economist John Quiggin’s contribution to No Ordinary Deal states the first five years of Australia’s FTA with the USA has only resulted in an average 2.5% increase in exports, compared with a substantial growth in the trade gap between the two trading partners. Dairy and beef exports have only made modest gains which doesn’t exactly give us confidence New Zealand would be any more successful.

Another feature of US trade agreements which we would want to avoid like the plague is the potential for investor companies to be able to sue the other country’s government for breaches of the FTA arising from changes in government policy and regulation. When asked about this John Key said it sounded “far-fetched”, but didn’t provide any confidence he had thought about it much if at all.

I just hope our Trade Negotiations Minister, Tim Groser, is able to use all his experience and undoubted negotiating ability to avoid handing over the crown jewels in the excitement of concluding a deal which might but is far from guaranteed to produce gains for our biggest exporters.

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