Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Trade deals? Let's look before we leap

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Should we leap to our feet to applaud the prospect of a trade agreement with Russia?

Should a warm glow engulf us when the Prime Minister sees building momentum in negotiations on the Trans Pacific Partnership, a regional trade pact including the United States?

Some quick number crunching by the NZ Institute of Economic Research indicates removing trade barriers with Russia would benefit New Zealand by only $27 million a year.

It is quick to add that the real gains are geopolitical and arise from a chance to "cosy up with the world's 12th largest economy".

Trade Minister Tim Groser has pointed to projections that Russia will overtake Germany to be Europe's largest economy by mid-century.

But that only reminds us that a country with 60 million more people than Germany and the resources that go with the world's largest land area is not already Europe's largest economy.

The reasons for that, 20 years after the Soviet empire collapsed, should give pause for thought.

Would Russia live up to its obligations under a free trade agreement?

We can't examine the evidence; this would be its first FTA. That might mean it has something to prove. But it might be a case of fools rushing in.

Nor can we consider its track record as a member of the World Trade Organisation. It isn't one.

Not its fault, perhaps, but it does mean we can't look at how often it has been hauled before a WTO tribunal accused of breaking the rules.

Russia is not a country with a profound respect for the rule of law.

Transparency International ranks it the 154th least corrupt country out of 178 in its corruption perception index. New Zealand (with Norway and Singapore) tops that list.

So when the NZIER lists "prospects for improved investment opportunities and investor protection" among the potential gains from free trade agreements, we might want to think about to whom New Zealand, as a capital importing company, would be flinging open its door.

Billionaires who have amassed their fortunes in ways that would not withstand close scrutiny, perhaps.

The risk of some asymmetry on the investor protection front seems high.

This matters because modern "trade" pacts tend to be at least as much about protection for foreign investors and intellectual property rights as traditional concerns about market access for goods.

We like to congratulate ourselves on being the first western country to do an FTA with China. And there is little doubt it has been positive for New Zealand exporters.

But less so for firms competing with imports. China has a $2 billion or three-to-two surplus in its trade with New Zealand.

The trade pact does not prevent us from being, with most of the rest of the world, on the wrong side of China's policy of maintaining an undervalued exchange rate - effectively a tax on imports and a subsidy to exports.

But the holy grail of trade policy remains a deal with the United States.

This raises two questions: What are the chances of such a deal, and what are the chances of a bad deal?

The contrarian view on these issues is explored in No Ordinary Deal, a book edited by Auckland University law professor Jane Kelsey.

A chapter by Lori Wallach and Todd Tucker on the American politics involved reminds us that even before the global financial crisis drove the US unemployment rate close to 10 per cent, millions of manufacturing jobs were lost to "offshoring" and the median real wage stagnated for years.

Many Americans, it seems, blame trade agreements they see as more concerned with protecting the interests of US corporations investing abroad than with American jobs.

US President Barack Obama's rhetoric when running for office appealed to that view, and the TPP is the first trade agreement in which he will be expected to deliver on it.

Congress, meanwhile, no longer gives the US Government authority to negotiate a pact that legislators can only vote up or down but not alter.

In the 2006 and 2008 elections, 72 House and Senate members who campaigned against the 1994 Nafta trade deal between the US, Canada and Mexico and agreements modelled on it have replaced those who supported it.

And many of the Tea Party Republicans in the new Congress are seen as of an isolationist, America First mind set.

It would seem, then, that a TPP agreement would have to be very different to traditional US trade agreements to avoid a train wreck on Capitol Hill.

But would an agreement big on workers' rights, for example, be acceptable to Vietnam, which is one of the TPP partners?

Meanwhile we have the example of the 2004 FTA between the US and Australia to indicate what a traditional agreement might look like.

Australian economist John Quiggin's contribution to No Ordinary Deal concluded that the FTA had produced few, if any, of the expected benefits for Australia, but the negative effects had been less severe than some critics predicted.

In the agreement's first five years, Australia's exports to the United States have increased only 2.5 per cent, compared with double-digit growth with its main Asian trading partners, and the trade gap in the Americans' favour has almost doubled.

The Australians secured only modest and long-drawn-out improvements in access for beef and dairy products to the US, and no gains at all against the egregiously protected sugar industry.

They also had to fight off a sustained attack from Big Pharma on their equivalent of Pharmac and its right to set prices for patented drugs.

Protection for foreign investors was substantial, Quiggin says.

"In effect the agreement precluded the application of any conditions on US investors in Australia that would not be applicable to domestic [investors]or vice versa.

"There was an exemption for investments worth more than A$800 million ... for which foreign investment review procedures remained applicable."

But the Australians avoided one of the more sinister features of other US trade deals - the privatisation of enforcement of the agreements.

Companies investing in the other country can sue its government in an international tribunal for alleged breaches of the FTA, usually arising from some attempt by the government to regulate some part of its own economy.

These "investor-state" cases are litigated in international arbitration bodies of the World Bank or United Nations.

Public Citizen, the advocacy body Wallach and Tucker work for, has monitored 66 such cases brought under Nafta. Of the 25 resolved, the governments won in 14 cases and the investors in nine, requiring the governments concerned to pay more that US$300 million in compensation.

The chilling effect of giving multinational corporations the right to stand in the shoes of a sovereign state in this way can only be guessed at.

Australia is the exception; three of the other TPP countries have agreements with the US that include such a provision.

Asked this week about the possibility the TPP would also include it, Prime Minister John Key dismissed the idea as "far-fetched".

But his reaction sounded more like "I have only just encountered this idea, but I wouldn't have thought so" than "I have looked into this and I can assure you it won't happen".

Reassured?

- NZ Herald

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