Shanker Singham: Brexit's opportunities for NZ

Wealth creation measures such as industrial output have been down since before the Global Financial Crisis.

Global trade as a proportion of total gross world product has also started to shrink. The multilateral trading rules underpinned by the World Trade Organisation (WTO) have been stalled for over 20 years.

You'd have to go back to the Uruguay Round in 1995 for the last comprehensive trade agreement concluded on a global basis.

Even regional arrangements such as TPP are foundering.

These economic realities have placed severe strains on government provision of public services, and on job creation. Global growth has been sluggish, and productivity gains in the EU and the developed world have been derisory.

The world is crying out for some sort of catalytic leadership to kick start the global economy.

It was against this backdrop that, on 23 June 2016, the British people voted to leave the European Union.

Since the vote, the UK Government has been determining its posture with the EU as it goes through the process which has been set forth to leave the EU.

This involves triggering Article 50 of the Lisbon Treaty, two years after which the UK will leave the EU with or without an agreement.

The withdrawal process will consist of a negotiated agreement between the UK and EU. This agreement will cover many non-trade issues to do with the UK's budgetary contribution, pensions liabilities, and security and defence arrangements.

But it is the trade aspects of the agreement that are of particular interest to New Zealand.
At the very least, a framework will be set out regarding the future trading relationship between the UK and the EU.

The UK government has made clear that it wants to negotiate a Free Trade Agreement (FTA) with the European Union, that on exit from the EU it will not be a member of the Customs Union and that it will not be a member of the EEA, or single market which is the rule setting body of the EU.

It plans to be a stand-alone member of the WTO.

Once in charge of its own trade policy, there are many areas of agriculture and fisheries where the UK will be able to unilaterally reduce its trade barriers because it simply does not produce those products or products that are substitutable with them.

For example, olive oil, citrus fruits, tropical fruits, rice and other products could be imported free of tariffs and thus made much cheaper almost overnight. This will benefit UK consumers.

New Zealand will clearly be interested in its lamb and dairy exports into the UK once it leaves, which account for almost 60 per cent of goods exports to the UK.

As the UK takes control of its tariff schedules in the WTO once more, it will first have to determine its share of the European import quota for these products.

Once that is done, it will be at liberty, if it so chooses, to offer greater liberalisation than the EU has been able to offer thus far.

The UK might, for example, convert the quota into a tariff and then negotiate it down in an FTA with New Zealand.

As long as the UK Government is able to support UK farmers through allowable direct supports, then we at the Legatum Institute believe that such liberalisation will actually be politically feasible.

This is one potential benefit for New Zealand.

British farmers are no great fans of the CAP, and provided there are reasonable transition periods and the example of NZ agriculture in benefiting from the market opening is explained, our preliminary soundings are that some liberalisation is indeed possible in the UK. But New Zealand is more than just lamb and dairy.

More openness can be secured in other sectors such as wine and apples.
The second benefit is in the long term more important.

When New Zealand and Singapore got together in the early 2000s to consider the possibility of a free trade agreement between their two open nations, this was not driven by short term commercial considerations.

This was a piece of trade strategy - the goal was to agree a high standards agreement that others might join given that the Doha trade round was stalling.

And this is precisely what happened.

The agreement that dealt with the new barriers to trade (competition distortions, regulatory barriers and so forth) became the P4, P4 plus One and then finally the Trans Pacific Partnership (TPP).

Now that Donald Trump has pulled the US out of the TPP, there is a vacuum of trade leadership in the Asia-Pacific region. While RCEP may bring about tariff liberalisation among countries in Asia, it does not deal with behind the border barriers and competition issues as TPP began to.

At the Legatum Institute, we believe the UK, out of the EU, is well placed to demonstrate such leadership.

It could catalyse a quadrilateral agreement consisting of New Zealand, Australia, Singapore and Britain which would be the beginnings of a Free Trade Agreement which has become known as a Prosperity Zone of like-minded countries that have a shared commitment to open trade, pro-competitive laws and regulations, and property rights protection.

The UK is ideally placed to do this because its economy is overwhelmingly based on services trade - services is about 80 per cent of its exports, and 80 per cent of its GDP. The barriers that services face are particularly domestic regulatory barriers.

The UK must therefore get good trade deals that cover services and regulatory barriers, in order for its economy to be successful on the global stage.

It will have to take the initiative or risk failure in the Brexit scenario.

We believe that if New Zealand can participate as one of the early pioneers of such a zone, other countries including Mexico, Canada, Switzerland, and the Pacific Alliance countries of Chile and Colombia will want to join.

On 9 March, for the first time, all Commonwealth trade ministers will meet in London. In 2018, all Commonwealth Heads of Government meet in London.

It is imperative that in the current global uncertainty, the UK's newfound freedom can be harnessed by its trading partners to catalyse a new wave of global growth through deeper, more liberalising agreements.

New Zealand as it did in the foundations of the TPP can play a critical role to unlock growth opportunities for itself and the world.

Shanker Singham is Chairman of the Legatum Institute's Special Trade Commission, which is providing advice to stakeholders in the Brexit process. He is in New Zealand to give a seminar in Wellington on in Wellington on Monday, with the NZ Institute of Economic Research. See nzier.org.nz for further details.