Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Trade deal taggers-on come with risks

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An old joke from the textile trade came to mind on hearing the news that Japan, Canada and Mexico want to join the Trans-Pacific Partnership trade negotiations: "Never mind the quality, feel the width."

Participation in a "21st century" trade pact with a grouping that includes two of the three largest national economies would be, in principle, a glittering prize indeed.

But the risk now is that admitting Japan, Canada and Mexico into the process would fundamentally change its dynamics, slow it down, and lead to a weaker outcome, particularly on agriculture.

Trade Minister Tim Groser welcomed the Japanese approach, naturally. After all Japan, like the United States, has never been interested in a bilateral deal with New Zealand - we are much too small and already pretty much wide open to trade and investment. (New Zealand, by contrast, would probably do a trade deal with Vatican City if it wanted one and if it included agriculture, just on general principles.)

There was a note of wariness, too.

"We now need to begin a careful discussion about what Japan's participation in the TPP negotiation would involve," Groser said. "New Zealand is strongly committed to the vision of TPP as a comprehensive and high-quality agreement."

The danger, to put it bluntly, is that the TPP talks morph into a bid to create a big Northern Pacific bloc, linking the three Nafta partners and Japan, while the agenda of the original TPP members becomes increasingly marginalised.

The risk of such a thing has always been present.

The eight existing TPP countries other than the United States represent only 6 per cent of US trade and four of them already have bilateral free trade agreements with it.

So the question of what is in it for the US has always been answered by an uneasy combination of the demonstration effect - let's show the world what a high quality trade agreement, fit for the 21st century looks like - and strategic US interests.

The latter is code for countering or pre-empting moves by Beijing to set up a Sino-centric trading bloc involving the three North Asian powers - China, Japan and Korea - and the 10 South-east Asian nations.

In this context the move by new Japanese Prime Minister Yoshihiko Noda to join the TPP negotiations has been seen as a geopolitically portentous move.

Risky too, if Japan's farm lobby is as politically powerful as it is usually taken to be and as that country's ferociously protectionist stance on agricultural trade would attest.

In these circumstances, one might think, the aspirations of the New Zealand dairy industry for better access to the American market is liable to become a fairly peripheral consideration.

But briefing journalists yesterday upon his return from the Apec meeting in Hawaii, Groser said there was no possibility of Japan, Canada and Mexico coming into the negotiation in the next six or eight months anyway.

"We will consolidate what we have had agreed by our leaders. Meantime each of the nine countries will start a process of consultation with Japan, Mexico and Canada. The consultation is not a negotiation," he said.

"It is not just a matter of turning up to this club and saying 'I want in'. There is a very high dress code required."

On the risk that enlarging the TPP will now become the focus of American attention, Groser said the crucial decision the US had made at the start of its involvement was that it wanted to get a high-standard agreement.

It had seen the risk that if other big economies were brought early it would get complicated and slow down. The US priority, Groser believes, has been to establish a state-of-the-art agreement and then ask who wants to join it.

In any case there is an argument that extending TPP to include Japan would helpfully shift the attitude of the US dairy industry towards the whole undertaking from a defensive one - keeping us out - to an offensive interest in gaining access for its own products to the highly protected Japanese market.

Japanese press reports quoted President Barack Obama as saying that agriculture would be the tough issue for Japan, but that the nine current TPP members would not delay negotiations.

The Honolulu summit has set the challenging target of concluding the TPP negotiations next year.

But it is one thing to negotiate a deal with the US Government. It is quite another for the US Senate to ratify it, as the melancholy example of the Kyoto Protocol attests.

It has taken three years and, in Groser's words, "exquisite political management" for the Obama Administration to secure ratification of three bilateral free trade agreements inherited from the Bush Administration.

Finance Minister Bill English said that what has changed is that political leaders, in the US and among developed countries around the Asia-Pacific region, recognise that the fundamental growth outlook for their economies is not that good, and that to deliver on any kind of growth expectations among the voters they will have to take on something other than the domestic interest that had stood in the way of trade liberalisation.

But with an annual trade deficit of more than US$500 billion ($653 billion) on the one hand and an unemployment rate of 9 per cent on the other, it is by no means a given that free trade arguments will beat protectionist ones with American voters.

The US Trade Representative does not have "fast track" negotiating authority from Congress, under which the latter confines itself to either voting up or down whatever agreement is negotiated.

In principle it could take apart and seek to alter any deal put before it.

In practice, the need to avert such a nightmare seems to mean US legislators have an influence on the negotiations which is unfortunate given the institutionalised venality of US campaign finance laws.

On fears for the future of Pharmac, Groser said the public health system, including Pharmac, was not up for negotiation. "It is not part of any trade negotiation. I can't conceive that any New Zealand Government will change that view."

Pharmac, he said, was an incredibly valuable institution providing medicines at highly subsidised, reasonable prices. "The fundamentals of the model are not up for negotiation."

Beyond that he would not be drawn.

Jane Kelsey, a law professor at Auckland University and anti-TPP campaigner, argues that what a "high-quality" agreement means in practice is measures which will put a straitjacket on governments' ability to regulate in their national interest across a wide range of issues.

"The first official statements about the TPP negotiations have told us nothing we haven't already gleaned from leaked documents, analysis of speeches from politicians and corporate lobbyists, and our own discussions with delegations," she said.

"We already know that the targets include Pharmac, tobacco control laws, restrictions on foreign investment, tighter environmental protections, GM and food labelling, regulation of oil exploration and construction standards, and many other areas where market-friendly regulation has failed. We need to see the draft texts so we can properly assess their implications and if they are not in our interests the Government should be required to walk away."

- NZ Herald

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