EU trade deal rings in the future for FTAs
Free trade deals. They sound great on the tin: more access to markets for New Zealand exporters, better access to imports, nations playing to their comparative advantage. Especially for a country such as New Zealand, which needs to trade to make its way in the world, to boost our standard of living.
But how do you reasonably assess the free trade agreement with Europe that was freshly minted in the early hours of Friday morning in Brussels.
The deal is touted to be worth $1.8 billion a year when fully in operation.
The European Union is New Zealand’s third-biggest trading partner, making up a little over 10% of total two-way trade.
New Zealand runs a trade deficit with Europe, meaning the value of goods and services we import is bigger than exports. In 2020, Aotearoa exported in total NZ$3.81b of goods and services and imported $9.04b.
On the one hand, for most sectors the agreement reduces or ends most tariff barriers and gives open access to European markets.
On the other, dairy and red meat get only a very small increase in market access.
For these sectors and overall, it is probably best described as an oldfashioned trade treaty: the two parties, Aotearoa and Europe, have fleshed out the deal for trade that, ultimately, both are happy to sign up to.
It isn’t free trade, but it is significantly expanded trade.
And in this negotiation Europe held the whip hand. New Zealand has a very small economy on the far side of the world, while Europe has a history of being a protectionist bloc, especially when it comes to the politically sensitive matter of agriculture.
BusinessNZ’s director of advocacy, Catherine Beard, probably summed it up best when she said that while ‘‘we could not call this a high quality comprehensive FTA, we acknowledge the hard work our negotiators put into this deal and the difficulty they were up against with the multitude of countries that make up the European Union’’.
In other words, there’s what you want and then there’s the political reality.
Federated Farmers announced the deal, saying that New Zealand should have walked away from it.
That would have meant New Zealand fully retained its reputation for close-topure FTAs, while not gaining anything for anyone. All principle and no trousers.
But signing it does rightly raise the question of whether agreeing to this lesser deal means New Zealand sets a new, lower, bar for future deals.
Yes, meat and dairy are the backbone of New Zealand’s export economy, but do you scotch a whole deal, in a lot of potentially high-growth service sectors, on the basis that there might be a better deal for those sectors down the line?
It is a tough call and the Government ended up, after years of negotiations, clearly considering that New Zealand had got all it was going to get – for now at least.
It also is a reflection of the fact that Europe is – and has been for a very long time – a big protectionist bloc full of democracies with powerful agricultural lobbies.
The disappointed sector groups also haven’t taken aim at the negotiators, but at protectionist Europe
For service, having unfettered access into European markets is huge and for other industries such as seafood, wine, honey and horticulture this will be big.
This will be the fourth trade deal the Government has signed New Zealand up to in the past five years. They join the UK free trade agreement, the Comprehensive and Progressive Agreement ofr TransPacific Partnership and the Regional
Comprehensive Economic Partnership.
The conclusion of this deal also poses a broader question about the future of free trade deals. New Zealand has long been a country that prides itself on getting as close-to-free-trade deals as possible. But, with the glaring exception of the United States – with whom New Zealand doesn’t have an FTA (but Australia does) – and India, a lot of the big deals have now been done. They will be revisited with time.
The Government likes to point to the fact that when it came to office, 50% of New Zealand’s exports were covered by FTA, whereas now it’s 75%. t is worth remembering that the China FTA in 2008 came at an historic moment, one which New Zealand capitalised on. When poorer countries start to get richer one of the first things their population wants is greater access to protein: meat and dairy. So it was with China.
China also used New Zealand as a proving ground for making an FTA. A small, friendly country could provide an upside for China and its consumers, with very little risk. The rest is history. China is now New Zealand’s largest trading partner.
Likewise with the UK, New Zealand was one of the first countries to make a deal post-Brexit, fulfilling a British political imperative to prove it could do these sorts of deals, at some domestic political cost, especially from Tory constituents. Thus, New Zealand secured a pretty good one.
India is the other potentially large free trade target for New Zealand, but it is much more complicated. Unlike China, it is the world’s biggest democracy – and a
Ifederal system – and so has many of the same pressures as apply to the Europe deal.
It is still largely a country of rural small-holding farmers and its agricultural support and subsidies are entrenched features of its domestic politics.
It is also a nation which, as it has got richer, has generated more than enough domestic demand to keep growing. It is not yet at a point where it really wants, or needs, to pursue FTAs.
The point is that, as much as New Zealand may not wish it to be so, the room to get meaningful access to big new markets over the next couple of decades may be more limited to services and not be in the more traditional agricultural sectors. Expectations may have to change. Despite New Zealand’s commitment to free trade, we may have to accept that the trade deals of the last decade will be harder to get.
It isn’t defeatist to consider that a possibility, while remembering that several deals we have signed up to are new and have still to deliver a lot of benefits.
None of this is to argue that New Zealand should not continue to strive to get the highest-quality free trade deals done, but the world changes, and it is perhaps a dose of reality.
This isn’t the 1980s and 1990s. It isn’t an epoch of deregulation or the end of history. Protectionism is alive and well globally and not going anywhere. A world of increased geo-strategic competition is only likely to make that worse.
Viewed in that way, this deal looks pretty good. But that’s cold comfort for those in the dairy and beef sectors.