NZ weighs US trade risk

By JIM EAGLES

Australia's commanding lead in the race to get a free trade agreement with the United States has prompted the Government to commission a study of the likely impact on investment in New Zealand.

The Institute of Economic Research has been asked to make a preliminary assessment of whether investment which might otherwise be made in New Zealand could be diverted across the Tasman by the prospect of free access to the huge US market.

This follows earlier studies which suggest New Zealand would probably lose trade in both the US and Australia but might make up some ground in other markets.

The issue has been given greater importance by the naming of Australia - along with Central America, Southern Africa and Morocco - on a national security strategy list of where the US will focus its efforts towards bilateral trade agreements.

Robert Scollay, associate professor of economics at the University of Auckland, who co-wrote one of those studies, said any comment about the impact of an Australia-US deal must be tempered by uncertainty over how it would work.

"But the effect can't be good for New Zealand," he said. "It's just a question of how serious the negative effect would be. It could range from being relatively mild to quite serious."

Scollay, who is also director of the New Zealand Apec Study Centre, said it was becoming increasingly clear that Australia would be well ahead of New Zealand in the queue to negotiate a trade deal.

At the start of the year New Zealand had campaigned very hard "either to be put on the same footing as Australia or ... for the Americans to negotiate with CER as a group" and for a time there were hopes those arguments might be accepted.

"But the way the US Administration's policy towards its various relationships has developed it's pretty clear that we will be further down the queue than Australia."

Scollay said there would have been various factors in that decision by the US, including the anti-nuclear policy and the fact that New Zealand was rated only as a very, very good friend while Australia was an ally.

But messages out of the US indicated that the Administration was also focusing on levels of importance "and, unfortunately, as a nation we are not as important as Australia".

On top of that "the Australians have made it quite clear that they would be offended if the Americans negotiated with us at the same time".

Scollay said in his view that stance was based not so much on trying to get one over New Zealand as the fact that Australian Prime Minister John Howard "feels that he must be able to demonstrate domestically a political pay-off to having not gone the anti-nuclear way".

However, while the aim might not be to get an advantage over New Zealand, "of course once they get the free trade agreement there will be economic interests within Australia that will want New Zealand kept out as long as possible".

Scollay said there were several areas in which an Australia-US trade deal would be likely to affect New Zealand:

* The US was one of New Zealand's main export markets and in several sectors of that market Australia was one of our main competitors "so it will mean that one of our main competitors has preferential access over us in that market".

* It was likely that US agricultural producers - who would oppose free access for Australia in the first place - would press for the quotas of other producers like New Zealand to be reduced by way of compensation.

* New Zealand would lose its advantage over US exporters of having preferential access to the Australian market "though I'm not sure to what extent we compete with each other there".

* There were concerns - "I know the Government is worried" - over what effect a trade deal would have on investment. For example, if a company like Fonterra was going to invest in new processing facilities, would it be better doing so in Australia so there was free access to the US?

Those last concerns have, in fact, prompted the Ministry of Foreign Affairs and Trade to commission the Institute of Economic Research to do a preliminary study of the effect on investment.



The Centre for International Economics in Canberra has also done a study - from an Australian perspective - of the impact of a free trade agreement.

It forecasts a boost to the Australian economy which by 2010 would be worth US$2 billion a year (not to mention a US$2.1 billion a year boost to the US economy).

It says New Zealand would be one of the main beneficiaries of the resultant economic growth since Australia is its main trading partner.

New Zealand should also be able to sell more dairy products into various Asian countries as a result of Australia diverting product to the more valuable US market.

On the downside, the centre predicts that New Zealand trade to Australia would decline by US$36 million and to the US by US$7 million as a result of trade displacement.

Overall, the report gives a mixed view of the impact of Australia-US free trade on New Zealand.

But the economic model used to study the impact on third countries shows a boost to New Zealand's GDP of around 0.035 per cent a year - the highest gain of the countries studied - leading it to conclude that "the main gainer is New Zealand".