The future of free trade agreements

New Zealand must continue to seek to increase our access to protected pastoral markets, but international trade deals come at a cost, writes economist Brian Easton

Many consider Michael Reddell, the writer of the Croaking Cassandra blog, as an eccentric provocateur. Maybe. But he is also a good economist and his judgments should be reflected upon, especially in his area of expertise in macroeconomic and monetary policy, and financial regulatory matters. 

Even so, I have considerable reservations over his recent A Free Trader Critiques the CPTPP. It is doubly interesting because Reddell rightly describes himself as pro-free trade. (I am always uneasy about the term ‘free trade’, but you know what it means.) Should not a pro-free trader support a free trade deal? The correct answer is ‘not always’.

Reddell particularly cites the Australian-US FTA (AUSFTA) which is widely thought to be a bad deal for Australia. Its Prime Minister, John Howard, staked his reputation on obtaining one. The US negotiators, knowing this, offered a deal which was in their interests but for which there was little for Australia. Howard was so committed he could not politically back out. 

(This is the reason I am reluctant for us to do a bilateral free trade deal with the US; we have so little leverage and were we as enthusiastic as Australia we would be screwed too.) 

So an FTA need not be beneficial to both parties. For example, were we to announce we would drop all our tariffs to zero to the US in exchange for nothing we would be unlikely to benefit, although the US would. (I note Reddell thinks otherwise.)

The difficulty of getting one’s head around FTAs is that they no longer correspond to the description in the economists’ textbooks. 

One difference is that they are increasingly going behind the borders – in effect moving towards the unification of market regulation between countries. There may sometimes be gains in doing this but 35 years of CER with its incremental steps in regulatory unification shows how difficult it is to do properly. Personally, I favour subsidiarity (that decisions should be left to the lowest level) over global unification. Additionally, I worry that the unification will favour the large (especially American) corporates. I am supported by some senior US economists. 

There is a second major difference, of special significance to New Zealand, between FTA reality and the textbook, . Generally border tariffs among rich counties are low (which means that the gains from trade may not be significant anymore, a reason for the shifting of focus to behind the border). The most important exception, as far as New Zealand is concerned, is that many of our pastoral exports suffer border restrictions – tariffs and quota – which are much higher than manufacturing protection; some are outrageously high. 

We have pursued FTAs aggressively in an attempt to improve access for our pastoral exports. Success works differently from the standard account. Typically it increases our prices without significantly changing the level of production. That would mean that GDP and productivity hardly increases, the concern of the textbooks, but effective GDP – our spending power – rises because we get better prices for our exports (i.e. the terms of trade rise). 

(If other countries get better access for their pastoral exports, world pastoral export prices will rise and we benefit too. Thus we benefited from the (incremental) increases that Australia got in its beef quota in AUSFTA.)

Extraordinarily, Reddell says that ‘there isn't much evidence (net) that they [the various FTAs we have agreed to] are making New Zealanders as a whole better off.’ As I have argued, an FTA is unlikely to make everyone better off in the short run. But there are overall gains.

For instance, it is not controversial to say that without the Chinese FTA the New Zealand economy and all those in it, would have suffered greatly from the Global Financial Crisis in a way that others did. (Even so we blew some of the potential benefits by allowing a speculative farmland boom; our trade negotiators were hardly to blame for this.) 

More subtly, the pastoral terms of trade have been rising since the Tokyo Round of multinational trade liberalisation in the 1970s. It would be foolish to say that the rise was entirely the result of the trade rounds, but it would be as unwise to say that trade liberalisation has had no effect. TPP11 involves a small improvement in pastoral exports access; there will be another (small) boost to export prices and a small boost to effective GDP (real spending power) if we respond sensibly.

Riddell makes some other criticisms of limitations of TPP11 for which there is not space to deal with. (For an alternative view of the investor-state dispute settlement provisions, see here. It is not the ISDS which undermines our sovereignty but that we encourage overseas investment.)

But I want to finish on a wider canvas. TPP11 may be our last plurilateral FTA of such broad scope. With the multilateral Doha Round stuck in a swamp, there will be bilateral deals, such as between us and the EU, and less ambitious plurilateral deals (such as RCEP – the Regional Comprehensive Economic Partnership among 14 Asian economies and Australasia). Other countries may choose to join TPP11 (Korea is mentioned; I doubt China ever will; a brexited Britain might – presumably it is a Pacific nation because of the Pitcairn Islands). I am sceptical that the US will rejoin, despite the deal having been designed to allow this – Trump has lost its leadership role. 

Whatever, New Zealand must continue to seek to increase our (and other countries’) access to protected pastoral markets. There are real gains from such a strategy, but we need to acknowledge that we will have to give up some things in return. International trade deals are like that; we will be worse off not to have them.

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