Beware fish-hooks in deal
A free trade agreement longer than a few sentences allows special interests to feather their own nests, says Jim Rose.
Even the best possible regional trade deal imaginable should be greeted with suspicion. Thoroughly inspect the baggage they carry; environment and labour chapters, stricter intellectual property rights, investor-state dispute settlement processes and revised government procurement rules such as for Pharmac.
Start with a sceptical eye, says Nobel prize-winning trade theorist Paul Krugman.
Indeed, the only time tariff cuts are suspect is when they are part of a regional trade agreement such as with the European Union, or recently with Britain.
The reason, according to Krugman, is trade diversion.
Trade is diverted from the lowest-cost supplier to a now duty-free source in the regional trade area.
We have been at the rough end of trade diversion in the two biggest regional trade agreements to affect us.
When Britain entered the Common Market in 1973, it cut back on buying cheap New Zealand lamb in favour of now tarifffree but otherwise more expensive French lamb.
British consumers paid much the same for lamb, but there was no tariff revenue to collect to then spend on public services.
New Zealanders got the raw end of the stick from Closer Economic Relations.
Instead of buying cheap Japanese imports and collecting a tariff, Holdens and Fords became cheaper because they did not pay this tariff. Cars were not much cheaper for New Zealand car buyers. The tariff revenue went off to Australian manufacturers as higher import prices, to help keep their inefficient car plants open.
John Cochrane, another American economist, asked why free trade agreements are so long; thousands of pages.
He says that these trade agreements should say no more than: ‘‘We do not charge tariffs, nor restrict quantities with quotas, nor will government procurement discriminate in favour of local companies.
‘‘We will do the same.’’ Job done. That is a free trade agreement.
Any free trade agreement that is longer than these few sentences will be an opportunity for special interests on the right and the left, both unions and big corporations, to feather their own nests.
Longer patent lives, more stringent enforcement of overseas copyrights, environment and labour standards, Pharmac buying more expensive drugs and so on, in return for the tariff cuts. The gains from these behind-the-border changes are never easy to quantify.
Even the most impartial spectators can disagree amongst themselves on whether these regulations are a plus or minus to begin with, so they cannot easily agree on whether reducing or increasing them is a good or a bad.
Thankfully, there is no investor-state dispute settlement chapter in the EU or UK trade agreements. Investor-state dispute settlement has no place in trade agreements between democracies.
Foreign investors can take their chances in democratic politics just like the rest of us. There will be gusts of populism from economic nationalists on the left and right, but foreign investors still get a fair deal.
The EU deal has brand-new gremlins, such as a climate change chapter and restrictions on the use of wine and cheese product names. These rules give up a little bit too much sovereignty for little in return, and legitimise the fraught concept of green tariffs between us and the European Union.
The modelling released by the Ministry of Foreign Affairs and Trade suggests that the EU trade agreement will in time boost the level of New Zealand’s real GDP by between NZ$1 billion and NZ$2 billion.
That is a tiny amount, one-fifth to onethird of 1% of real GDP, in return for a box of tricks.