Author: Benedict Xu-Holland
Over the last two decades the negotiation and completion of bilateral and multi-lateral trade agreements has been at the forefront of New Zealand’s foreign policy. Notable achievements include being the leading participant in negotiations for the U.S-led Trans-Pacific Partnership Agreement (TPP) and the China-backed Regional Comprehensive Economic Partnership (RCEP).
This focus leads commentators in policy circles to characterise Wellington’s foreign policy strategy as a trade-above-all-else agenda. Although, the wider benefits of trade agreements range from strengthening international security to a way of leveraging New Zealand’s influence internationally. In domestic politics the TPP is described by Prime Minister John Key as an economic bonanza: ‘that’s more jobs, higher incomes and a better standard of living for New Zealanders’.
Over the last two decades the negotiation and completion of bilateral and multi-lateral trade agreements has been at the forefront of New Zealand’s foreign policy. Notable achievements include being the leading participant in negotiations for the U.S-led Trans-Pacific Partnership Agreement (TPP) and the China-backed Regional Comprehensive Economic Partnership (RCEP).
This focus leads commentators in policy circles to characterise Wellington’s foreign policy strategy as a trade-above-all-else agenda. Although, the wider benefits of trade agreements range from strengthening international security to a way of leveraging New Zealand’s influence internationally. In domestic politics the TPP is described by Prime Minister John Key as an economic bonanza: ‘that’s more jobs, higher incomes and a better standard of living for New Zealanders’.
Despite its success in negotiations, Wellington has not done enough to assess the impact of preferential trade agreements (PTAs), often incorrectly referred to as Free Trade Agreements, for the global economy or for regional security. In New Zealand there appear to have been no after-the-fact studies on the impact of trade agreements and little analysis has been done on the impact of the free trade agreements on third party countries.
This gap is doubly puzzling because it is not difficult to find research which shows that PTAs could potentially lead to ‘trade diversion’ where trade and capital is allocated sub-optimally. Trade diversion is most likely to occur when trade barriers are retained on many of a country’s trading partners, but lowered for a privileged few. This year an ANU study found that Australia’s bilateral preferential trade agreement with the United States failed to create any new trade and instead diverted existing trade between Australia and countries in the Asia Pacific region to the United States. The authors of the study posited that political rather than economic factors were the main motivations behind the agreement.
Regional trade agreements (RTAs), their proponents argue, could be the solution to the proliferation of PTAs. Regional agreements encourage non-participant countries to sign up in order to mitigate any trade discrimination. However, their results may also be disappointing. The complexities of recent multilateral trade agreements such as the TPP, which encompass not just tariff reductions but environmental legislation, investor-state dispute provisions, intellectual property laws, and unionisation provisions, create significant barriers for new members.
It is unlikely that China or even India could agree to these provisions as conditions of entry into the TPP. This is compounded by the fact that once signed, the treaties cannot be re-negotiated for new entrant countries, who may have different requirements and political interests. This situation is particularly discriminatory for developing countries which would have to comply with stringent non-trade regulations if they were to sign under existing TPP provisions.
Both the United States and China have a habit of framing their trade agreement involvement in geopolitical terms, lessening the emphasis on trade liberalisation. While these two factors need not be mutually exclusive, the design of the agreements makes them so. The impetus for the United States is to cement its power in Asia. The TPP serves as the economic pillar of its Asia rebalancing strategy. President Obama has noted that ‘if the United States doesn’t write the rules, China will’. The strategy was made crystal-clear following China’s creation of the Asian Infrastructure Investment Bank (AIIB), which galvanised American legislators into giving President Obama special powers (‘fast track authority’) for the TPP negotiation in the face of domestic opposition.
The RCEP has similar geopolitical goals. Participating in the RCEP is part of China’s strategy to bind Asia closer to China. And unlike the TPP, this regional agreement is also structured to suit the specific needs of developing economies in Asia. The RCEP is less focused on full-scale regulatory integration and instead seeks to harmonise existing individual PTAs signed with ASEAN countries.
These recent trade initiatives might just balkanise Asia into a number of competing and at times overlapping mercantile trade blocs, a process which New Zealand could be unwittingly encouraging. For instance, Vietnam’s textile industry stands to gain tremendously from new market-access, but in order to benefit it will have to source raw material from countries belonging in the TPP, which excludes some of its largest trading partners.
Even if a developing-developed country gap can be avoided, New Zealand companies now have to negotiate with more regulatory requirements than before. They are caught between a hodgepodge of individual trade agreements and multilateral trade agreements, all with different requirements and tariff levels. This is not conducive to economic efficiency or to the optimal allocation of trade. Any welfare gains from lower tariffs might just be offset by new regulatory hurdles and non-tariff barriers which are unable to be overcome by provisions in the TPP and RCEP.
This is not to say that the most recent trade agreements are damaging for the New Zealand economy or its foreign policy interests. However, policy-makers and politicians should be clear-headed when discussing the potential implications of these deals. These agreements will be unlikely to bring about the free trade and regional integration that their advocates are hoping for. Rather, they are largely political agreements, conducted under political and strategic calculus.
For free trade advocates, unilaterally liberalising trade barriers if and when they benefit New Zealand consumers will be more efficient at increasing welfare. This is not an unusual step - New Zealand started doing just that during the 1980s under the Lange-led Labour government. Unilateral reductions could be complemented with a diplomatic effort to restart negotiations under the auspices of the World Trade Organisation, where negotiations focus on broad multilateral tariff reductions. Until then New Zealand faces a ‘new normal’ in which trade is negotiated within a complex and evolving paradigm between competing strategic rivals.
Benedict Xu-Holland is an honours student at the University of Sydney and a managing editor at Incline. He can be contacted on benedict.xuholland@incline.org.nz.
This gap is doubly puzzling because it is not difficult to find research which shows that PTAs could potentially lead to ‘trade diversion’ where trade and capital is allocated sub-optimally. Trade diversion is most likely to occur when trade barriers are retained on many of a country’s trading partners, but lowered for a privileged few. This year an ANU study found that Australia’s bilateral preferential trade agreement with the United States failed to create any new trade and instead diverted existing trade between Australia and countries in the Asia Pacific region to the United States. The authors of the study posited that political rather than economic factors were the main motivations behind the agreement.
Regional trade agreements (RTAs), their proponents argue, could be the solution to the proliferation of PTAs. Regional agreements encourage non-participant countries to sign up in order to mitigate any trade discrimination. However, their results may also be disappointing. The complexities of recent multilateral trade agreements such as the TPP, which encompass not just tariff reductions but environmental legislation, investor-state dispute provisions, intellectual property laws, and unionisation provisions, create significant barriers for new members.
It is unlikely that China or even India could agree to these provisions as conditions of entry into the TPP. This is compounded by the fact that once signed, the treaties cannot be re-negotiated for new entrant countries, who may have different requirements and political interests. This situation is particularly discriminatory for developing countries which would have to comply with stringent non-trade regulations if they were to sign under existing TPP provisions.
Both the United States and China have a habit of framing their trade agreement involvement in geopolitical terms, lessening the emphasis on trade liberalisation. While these two factors need not be mutually exclusive, the design of the agreements makes them so. The impetus for the United States is to cement its power in Asia. The TPP serves as the economic pillar of its Asia rebalancing strategy. President Obama has noted that ‘if the United States doesn’t write the rules, China will’. The strategy was made crystal-clear following China’s creation of the Asian Infrastructure Investment Bank (AIIB), which galvanised American legislators into giving President Obama special powers (‘fast track authority’) for the TPP negotiation in the face of domestic opposition.
The RCEP has similar geopolitical goals. Participating in the RCEP is part of China’s strategy to bind Asia closer to China. And unlike the TPP, this regional agreement is also structured to suit the specific needs of developing economies in Asia. The RCEP is less focused on full-scale regulatory integration and instead seeks to harmonise existing individual PTAs signed with ASEAN countries.
These recent trade initiatives might just balkanise Asia into a number of competing and at times overlapping mercantile trade blocs, a process which New Zealand could be unwittingly encouraging. For instance, Vietnam’s textile industry stands to gain tremendously from new market-access, but in order to benefit it will have to source raw material from countries belonging in the TPP, which excludes some of its largest trading partners.
Even if a developing-developed country gap can be avoided, New Zealand companies now have to negotiate with more regulatory requirements than before. They are caught between a hodgepodge of individual trade agreements and multilateral trade agreements, all with different requirements and tariff levels. This is not conducive to economic efficiency or to the optimal allocation of trade. Any welfare gains from lower tariffs might just be offset by new regulatory hurdles and non-tariff barriers which are unable to be overcome by provisions in the TPP and RCEP.
This is not to say that the most recent trade agreements are damaging for the New Zealand economy or its foreign policy interests. However, policy-makers and politicians should be clear-headed when discussing the potential implications of these deals. These agreements will be unlikely to bring about the free trade and regional integration that their advocates are hoping for. Rather, they are largely political agreements, conducted under political and strategic calculus.
For free trade advocates, unilaterally liberalising trade barriers if and when they benefit New Zealand consumers will be more efficient at increasing welfare. This is not an unusual step - New Zealand started doing just that during the 1980s under the Lange-led Labour government. Unilateral reductions could be complemented with a diplomatic effort to restart negotiations under the auspices of the World Trade Organisation, where negotiations focus on broad multilateral tariff reductions. Until then New Zealand faces a ‘new normal’ in which trade is negotiated within a complex and evolving paradigm between competing strategic rivals.
Benedict Xu-Holland is an honours student at the University of Sydney and a managing editor at Incline. He can be contacted on benedict.xuholland@incline.org.nz.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
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