Are We Keeping Up With the Changing Global Trade Patterns?

Much of the response to the recent New Zealand-European Union Free Trade Agreement was disheartening, especially the complaints about the limited gains for our meat and dairy products. Yes, the gains were small, but significant in the circumstances.

About a decade ago the EU ambassador told me that there was much goodwill from the EU towards New Zealand but we had little to offer. We were a small economy and had unilaterally abandoned so much protection in the 1980s and 1990s that we had little to give them.

The abandonment of that border protection was like the bloke at a picnic who took off all his clothes and invited everyone else to follow; they took one look and put on another jersey; alas, it was not woollen. I’ve put a note at the bottom about the details, but it was the same farm sector now moaning about the current deal which welcomed the ending of that protection some decades ago.

Negotiating with the EU is in principle more difficult than with the US (with whom we still have not got a deal). The US government has to persuade the Senate to accept what they negotiate, so they have to win over half the 50 states. An EU agreement involves every one of its 27 nations agreeing – in effect each has a veto.

It was therefore a bit of a miracle that the EU gave us anything. In contrast, the US has a much greater interest in the Pacific, but it is not willing to use opening up trade as a part of its overall strategy.

So we gathered the little together we could offer and got duty-free access on 97% of New Zealand’s current exports to the EU, most immediately. That means that our exporters should save annually about $100m from tariff elimination from day one. The immediate tariff elimination is for kiwifruit, wine, onions, apples, manuka honey and manufactured goods, as well as almost all fish and seafood and other horticulture products. Almost all of our service providers will be able to access EU markets on an equivalent basis to others. We will have access to the largest government procurement market in the world.

Yes, there were only small gains in access for dairy products and red meats. That has caused the outcry but to my mind the gains were not trivial. I have listed them in an appendix.

(The agreement has 26 chapters but as far as I can see, most of them cover matters involving friends simplifying trading relations rather than making concessions.)

One is astonished how little we had to give away. Residual tariffs ranging between 5-10% on such things as apparel and footwear, plastics, forklifts and kitchen appliances will be abolished. We will eliminate our ability to label cheese ‘feta’ in nine years time; it will taste just the same. (The EU wanted concessions which would have compromised Pharmac and animal medicines. Miraculously, they were fought off.)

The big grief for me is that we are (almost immediately) extending copyright from 50 to 70 years after the author’s death. Copyright is usually justified as providing an incentive to create works but how posthumous copyright produces more works is a mystery. A study released by the government in 2016 calculated the annual cost of the copyright extension at $55 million, but that measure may be misleading. It does not include all the damage to those scholarly and intellectual activities which are not well covered in GDP. As the extension has resulted in a good deal for our farmers, I suppose New Zealand readers are taking one for the team. It would be appreciated if the team was to provide a little compensation but this Government is not notably committed to cultural affairs.

That is the nature of trade deals; you win some and you lose some. Perhaps what gave us some leverage was that Brexit damaged our access to the EU from the way sheep-meat quotas were allocated between the EU27 and Britain. We could have taken them to court; the compromise was better access in a trade deal.

Of course it is disappointing, but what can you expect? The sad fact is that over the last three-quarters of a century, global liberalisation of international trade in foodstuffs has been incremental. The big gain may have been the 2015 Nairobi package, which restricts ‘dumping’ (exporting subsidised surpluses) into third markets.

In the above, I have assumed trade deals are generally beneficial, while acknowledging that they make some in the community worse off (including those in New Zealand making apparel and footwear, plastics, forklifts and kitchen appliances). They have not been so beneficial for some countries; the poorest have hardly been able to participate.

However, conventional free trade deals are coming to an end. (We still have some small ones on the boil; one is pessimistic about big ones with India or the US.) But as the 26 chapters of the agreement with EU show, there is still much else to be dealt with. A nice illustration is the 2013 (Bali) Trade Facilitation Agreement, which reduced red tape and streamlined customs.

While the growth of international trade of goods is slowing down – their higher growth rates are slowing down – there remain opportunities in services.

So we are moving into a new era of trade negotiations. We should not forget, however, that the old one has served us reasonably well as we have hitched onto East Asia’s (especially China’s) booming demand for foodstuffs with its growing affluence. We will continue to try to reduce barriers to our foodstuffs but it is as important to diversify our trading partners; hence the importance of the smaller deals.

The era of comprehensive multilateral deals such as the Tokyo, Uruguay and Doha rounds is over. New Zealand will continue with bilateral deals such as the recent EU and UK ones, but has to be cautious that as a smaller partner it will not be screwed. (Australia was by the US in the 2004 AUSFTA.) We seek ‘open plurilateral deals’ (OPDs) such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Regional Comprehensive Economic Partnership (RCEP), which are designed to allow others to join. (They reduce the power of the bigger partners to bully.)

Often the OPDs are in specific fields, as in the cases of the Digital Economy Partnership Agreement (DEPA) and the Agreement on Climate Change Trade and Sustainability (ACCTS) and trade instruments/arrangements (e.g. the Indigenous Peoples’ Economic and Trade Arrangement; the Inclusive Trade Action Group and the Global Trade and Gender Arrangement).

We also need to be alert to new structural changes. The supply chain difficulties from the Covid pandemic and the invasion of Ukraine may presage a reconfiguration of both world trading patterns and the agreements that regulate them.

Most of all, we need to be brutally realistic about the possibilities; a realism which was not evident in some of the commentary after the recent FTA with the EU.

 

Appendix: What the FTA with the EU means for pastoral exporters

Some of these changes will not happen immediately, but are phased in over seven years.

Beef: our current access is around 1,000 tonnes (20% tariff). The FTA delivers 10,000t at 7.5% tariff.

Sheep meats: an additional 38,000t with a zero tariff on top of our existing quota of 127,000t that we only half filled in the past five years

Cheese: the current preferential access for  6,031t has not been used in the past five years because the quota tariff rate was prohibitive. The FTA delivers 31,031t (including the 6,031t), all at a zero tariff rate.

Butter: the current access is 47,000t of butter has not been used for last five years because of the 700euros/t quota tariff rate. The FTA has a quota access for 36,000 tonnes, with a tariff rate of 5% of the MFN tariff. (The remaining 11,000t is at a tariff set at 30% of the MFN rate.)

Milkpowders: currently NZ has no preferential access. After the FTA we will get 15,000t at 20 percent of the MFN tariff. High protein whey products will have duty-free quota access reaching 3,500t. Other dairy products including caseins, peptones, lactose, liquid cream, ice cream and retail infant formula will have tariffs eliminated.

No one else, other than post-Brexit Britain, has dairy access to the EU on anywhere like the same scale as we do.

 

Going Naked at a Picnic.

The major elimination in protection of the late 1980s and 1990s is a nice illustration of how sloppy economic analysis can cause difficulties. In the early 1980s the Treasury commissioned a study to calculate the effective rate of protection (don’t ask; it does not matter here). They went to Australian (neoliberal) consultants because our neoliberals did not trust New Zealanders to provide their answers. The research required an estimate of the cost excesses (do ask; they are the additional costs that are caused by having to source from protected local industry). The consultants did not know what they were, so they assumed they were either 10 percent, 20 percent or 30 percent. The conventional wisdom, especially the farm lobby, took the 20 percent to be the best estimate, which would have meant that if they were currently paying 100 for their inputs they would pay only 83.3 (1/1.2) for their inputs if protection was removed. They were dismayed when the abolition of border protection did not give them the 20 percent gain. Brian Philpott did the hard work and estimated the excess cost ratio to farmers was about 4 percent. That it was low should not have surprised anyone, because the government tended to reduce the level of border protection on inputs to the exporting farm sector. (The consultants made some other errors, as you might expect by outsiders unfamiliar with a local economy; sigh.)