NZ takes the right trade path
Gains tough to measure, but deal better than protectionism
Eleven Pacific Rim countries are standing up against the mounting tide of protectionist beggar-thy-neighbour policies.
News from Tokyo this week that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as it is now called, has been pushed across the line and set to be signed in March is welcome.
It is, in fact, less comprehensive than the original TPP, because of the withdrawal of the United States.
While that was just about the first thing Donald Trump did upon becoming President, US participation was in trouble anyway. President Barack Obama had been unable to get it ratified and Hillary Clinton ran on a platform opposed to TPP.
But the agreement is arguably more progressive, inasmuch as improved access to the US market would have come at a stiff price.
That is evident in the 20 provisions in the original agreement which the US demanded and which have now been suspended unless and until it changes its mind and seeks to re-enter the agreement. Right now that seems a remote prospect.
Most of the provisions which have now been backed out of the agreement relate to intellectual property or investor-state dispute resolution. These were aspects of the original agreement which aroused most opposition.
The Government is confident the agreement does not compromise its ability to restrict foreign ownership of residential real estate.
Ratification of the revised agreement will require a new national interest analysis to inform parliamentary consideration of the legislation needed to give effect to the pact.
Hopefully, that will be a less tendentious effort than the last one.
To be fair, accurately quantifying the benefits and costs of agreements as wide-ranging as modern “trade” deals tend to be is virtually impossible.
The remaining CPTPP countries account for about 29 per cent of New Zealand’s two-way trade. But roughly half of that is with Australia, with which we already have CER.
And while it is possible to calculate the reduction in tariffs on New Zealand’s exports to those countries, that tells us nothing about who would capture the benefit of those tariff cuts: New Zealand producers, consumers in the importing countries, or middlemen? It depends on who has the market power at various points in the value chain and generalising about that is just silly.
But in a binary sense, if New Zealand exporters trying to sell, say, beef to Japan are on the wrong side of tariff barriers which competitors from third countries do not face, eliminating that disadvantage is clearly desirable.
The lion’s share of the benefits claimed for the original TPP were attributed to the reduction of nontariff barriers.
But trying to get a grip on those effects is about as easy as catching trout with your bare hands. As acknowledged by the World Bank — whose modelling suggested TPP could boost New Zealand’s gross domestic product by up to 3 per cent by 2030 — assessing the impact on non-tariff barriers was “particularly fraught with uncertainty”.
The authors of the previous national interest analysis did not tell us what non-tariff measures they had in mind, or how to distinguish legitimate regulatory measures adopted for reasons of public health, say, or financial stability from nontariff trade barriers adopted for protectionist reasons.
Instead, it was a matter of airy generalities and articles of faith. In any case, the trade-distorting nontariff barriers most relevant to New Zealand — domestic subsidies to Japanese and Canadian farmers — have escaped essentially unscathed from the TPP process.
The Ministry of Foreign Affairs and Trade’s basic argument is that reducing tariff and non-tariff barriers will raise the competitiveness of New Zealand exports, boosting demand for goods and services where we have a comparative advantage, facilitating economies of scale and encouraging a more efficient allocation of investment within New Zealand, thereby raising GDP.
But Auckland University economics professor Tim Hazledine argued that the kinds of models used to try to quantify these effects depend on “crude assumptions about how real-word markets function and their results are very sensitive to errors in these assumptions.”
So why should we welcome CPTPP getting across the line?
The answer, at its simplest, lies in Pope Francis’ call to build bridges, not walls.
The Centre for Economic Policy Research’s global trade alert reports have been tracking governments’ trade interventions since 2009 and have found a marked rise in protectionism. In 2016, for example, 571 of the interventions they monitored were characterised as discriminatory and only 200 as liberalising. Early data for 2017 point to a continuation of this trend, especially in the United States.
The CPTPP announcement this week stands in poignant contrast to the Trump Administration’s imposing tariffs on solar panel imports, which come largely from China. Further trade remedies on steel, aluminium and over intellectual property are expected, raising the risk of a trade war between the world’s two largest economies.
Even if the US is right that Chinese government support for its manufacturers of solar panels is crowding out competitors in other countries, it needs to take account of the fact that only one in seven of the jobs in the US solar industry are in manufacturing photovoltaics. The cost of higher prices in job losses among solar installers may well exceed any benefit in protecting the manufacturing jobs.
It illustrates the general point that while the benefits of protectionism are concentrated and visible, the costs tend to be diffused but greater.
World trade volumes have at last been recovering from recessionary lows after the global financial crisis. Last year world trade, in goods and services, grew 4.7 per cent in real terms, up from 2.5 per cent in 2016, the International Monetary Fund estimates.
Meanwhile, on the prices front, New Zealand is enjoying the most favourable terms of trade ever.
Yet even in these favourable circumstances we are running a trade deficit of $3.4b. Narrowing that gap will take more than a CPTPP. But it will help.
Narrowing [NZ’s trade deficit] will take more than a CPTPP. But it will help.