Trying to quantify the gains from planned trade agreement is an exercise in futility

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The Government is throwing numbers at us as it steps up its efforts to sell the Trans-Pacific Partnership agreement. But a trenchant critique of the case it makes compels us to disregard those numbers. It is in a paper, The Economics of the TPPA, authored by Professor Tim Hazledine and Barry Coates of Auckland University's business school, Victoria University economist Geoff Bertram and business journalist Rod Oram. The first set of numbers the Government has been brandishing, most recently in this week's national interest analysis of the agreement, is the amount by which tariffs on New Zealand exports to other TPP countries will be reduced. It rises to $274 million a year when TPP is fully implemented. But as Hazledine points out, that tells us nothing about who would capture the benefit of those tariff cuts: New Zealand producers, consumers in the importing countries, or middlemen? It depends on who has market power at various points in the supply chain, and generalising about that is just silly. And as Coates argues, in the case of agricultural trade, such sums are dwarfed by the ongoing and massive subsidies to farmers in the United States, Japan and Canada, and by the normal fluctuations in commodity prices and exchange rates. The other number that is getting a rhetorical thrashing at the moment is the $2.7 billion (in 2007 dollars), or 1 per cent, by which New Zealand's gross domestic product is estimated to increase by 2030 as a result of the TPP. This is based on modelling commissioned by the Ministry of Foreign Affairs and Trade.

Trying to get a grip on those effects is about as easy as catching trout with your bare hands.
A different modelling exercise by the World Bank put the potential cumulative boost to GDP at up to 3 per cent by 2030. In both cases, the lion's share of the gains is attributed not to tariff reductions but to the reduction in behind-the-border non-tariff measures (NTMs). Trying to get a grip on those effects is about as easy as catching trout with your bare hands. As the World Bank acknowledges: "assessing NTMs and their impact is particularly fraught with uncertainty since data on the existence of restrictive NTMs are highly uneven." The modelling which MFAT relies on, undertaken before the TPP agreement was finalised, nevertheless concluded that reductions in NTMs would boost New Zealand's GDP by $2.9 billion by 2030. The ministry, just to be conservative, has halved that but it still represents the majority of the claimed economic benefit of the TPP agreement.
In any case, the trade-distorting non-tariff barriers of most relevance to New Zealand - domestic subsidies to American, Japanese and Canadian farmers - have escaped essentially unscathed from the TPP process.
We are not told what non-tariff measures they have in mind, however, or how to distinguish legitimate regulatory measures adopted for reasons of public health, say, or financial stability from non-tariff trade barriers adopted for protectionist reasons. Instead, it is a matter of airy generalities and articles of faith. In any case, the trade-distorting non-tariff barriers of most relevance to New Zealand - domestic subsidies to American, Japanese and Canadian farmers - have escaped essentially unscathed from the TPP process. MFAT's basic contention is that reducing tariff and non-tariff barriers will raise the competitiveness of New Zealand exports, boosting demand for goods and services where we have a comparative advantage, facilitating economies of scale and encouraging a more efficient allocation of investment within New Zealand, thereby raising GDP. But Hazledine argues that the kinds of models used to try to quantify these effects depend on "crude assumptions about how real-word markets function and their results are very sensitive to errors in these assumptions." Oram looks at the TPP deal from the standpoint of New Zealand's "gravest economic weakness", which is how little of the value added between farm gate and end consumer is captured by New Zealanders. Liberalisation should make it easier for New Zealand enterprises to invest further along the value chain and capture more of that value added. But it also makes it easier for companies in our export markets to reach further upstream. The effects, he suspects, will be asymmetric: "Large-scale overseas companies with close connections to their consumers will find it easier to tap into New Zealand resources than small New Zealand companies will find it to develop relationships with overseas consumers."
So where does this leave us? If we have to discount as mere spin the Government's attempts to quantify a net economic benefit, does that mean TPP is a bad deal for New Zealand?
Bertram, meanwhile, argues that TPP's contentious investor-state dispute resolution procedure will have a chilling effect on the Government's ability to regulate in the public interest - an assertion it disputes - and that that is part of the unacknowledged costs against which any benefits from TPP have to be weighed. So where does this leave us? If we have to discount as mere spin the Government's attempts to quantify a net economic benefit, does that mean TPP is a bad deal for New Zealand? That depends on how you answer two binary questions: if the brutal reality is that we live in a world where the big boys call the shots, which big boy do we want to set the rules for international commerce in the Asia-Pacific - the United States or China? Those are the terms in which President Barack Obama has framed the issue. Secondly, what is the counterfactual? The Government argues that the alternative is not the status quo, where there is no TPP, but rather one where there is a TPP but New Zealand is not in it. TPP is not an exercise in free trade. It is a preferential trade agreement encompassing more than a third of global GDP, 40 per cent of New Zealand's goods exports and 47 per cent of its services exports. Do we want to be inside or outside that bloc, if outside means being at a competitive disadvantage to rival suppliers inside it? MFAT notes that New Zealand's beef exports to Japan have fallen by a quarter since the Australia-Japan free trade agreement came into force. Beef exports to Korea have also suffered since the US-Korea FTA came into force. So we are left with these binary choices: US or China? In or out? Yes or no? It doesn't mean we have to like it. Read the research here:
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