Some playing fields just aren't level

The imbalance in New Zealand's relationship with Australia is evident at many levels. And it is in New Zealand's interest that it be the one to tone up CER, despite its lack of leverage, says COLIN JAMES.

Put aside thoughts of a common currency or a common market. Instead think of joint regulatory agencies, progressive harmonisation of the business operating environment and better information flows on policy development.

Finance Minister Michael Cullen wraps up his ambitions for CER in the phrase "single market" and focuses on investment and international tax. Trade Minister Jim Sutton adds a sort of supra-market focus: sharing the regulatory burden.

Both are keenly aware of the asymmetry of the transtasman relationship. At best New Zealand offers Australia a degree of "bulking up", like adding "another Victoria", says Cullen. New Zealand needs Australia much more, so New Zealand must do most of the pushing for change.

The asymmetry is evident at the political level - Australia sees itself as a middle power, closely aligned with the United States and more deeply involved in Asia. But it is much more marked among Australian bureaucrats.

Time and again, ministers - most notably Sutton and his counterpart Mark Vaile in 2000 - announce initiatives only to find that, as Cullen has noted, they lose momentum in the bureaucratic machines.

In fact, Australian Prime Minister John Howard has been much more solicitous of New Zealand than his predecessors, establishing the annual bilateral prime ministerial meeting and explicitly recognising New Zealand's crucial help in East Timor and over the Tampa refugees. Prime Minister Helen Clark in return has made her personal relationship with Howard a prime focus of her international policy and has been scrupulously careful not to criticise him - for example, over the Tampa refugees and his Iraq stance.

Taking his cue from that, Cullen has got Costello - likely to follow Howard as Prime Minister - into yearly meetings, apparently willingly on Costello's part.

What does Cullen want in his single market?

Not a common currency. That is off both countries' agendas.

Nor a common market or Customs union. Some of the ingredients are present - a common labour market, almost free flow of investment - and there is mutual recognition of goods and services standards and of professional qualifications except for doctors. This agreement is now being reviewed to enhance it.

But the two countries have different tariffs on goods from other countries, though there has been full free trade in goods and most services for more than a decade.

Moreover, to qualify for tariff-free entry to Australia, New Zealand goods must have 50 per cent New Zealand content, above the level in Singapore's free trade agreements with both countries - those "rules of origin" are now under review. And Australia still has barriers to New Zealand operators of six types of services (including post). New Zealand has two against Australia.

However, both countries are on track to eliminate tariffs by the end of this decade. This in effect will produce a common market in goods - though it will also remove New Zealand's trading advantage in Australia over other countries.

The aim of a "single market" is to get "behind the border" so that investing and doing business in either market is the same, or nearly the same, as doing business in the home market. There would just be one home market.

Costello summed this up as: "Mutual recognition, business harmonisation, corporate harmonisation, improving tax harmonisation". Cullen characterises it in his article for this supplement as "to further foster and encourage transtasman flows of investment".

Such issues have been the CER focus for a decade or more and there have been sporadic harmonising agreements - such as, last month, a partial agreement on dividend tax imputation - plus, since 1999, moves to align New Zealand competition and investment law with Australia's, with insolvency and company registration now following.

But Australia's decision last year to change its accounting standard to the international (IASB) standard came out of the blue. New Zealand has had to scramble to get in line and Cullen pleaded with Costello to keep New Zealand informed of what Canberra is up to.

The same goes for joint international action. In 2001 Australia launched its bid for a free trade agreement with the United States without forewarning this country, despite the implications for CER and New Zealand generally. That does not bode well for joint negotiations with other countries, such as Chile or the Asian Free Trade Area, as New Zealand would like. Australians sometimes seem to see New Zealand as an irksome younger brother tagging along and spoiling its fun.

And there are reverse examples. New Zealand has introduced a standard for fluorescent lights which in effect transgresses the mutual recognition agreement.

So ministers, particularly in this country, have been pushing for early warning systems of what the other country is up to. That is, Cullen says "so we don't get moving in different directions and there are no shocks".

Cullen acknowledges this is not easy. How do officials - or ministers for that matter - decide when something under way deep in the bowels of the bureaucracy should be disclosed to officials on the other side? And how do they manage confidentiality in the early stages of policy development when maybe not many people on your own side know about it?

The point is not just information but the chance to influence. In the teeth of opposition from officials but approval from Australian ministers, New Zealand is making submissions on Australia's review of its trade practices (competition) law.

The accounting bombshell gives added piquancy to Cullen's "investment" focus.

The problem is that at the margin, differences in operating rules prompt Australian-based companies either not to move activities here or to repatriate them after takeovers or during consolidations. New Zealand loses business and jobs and Australia gains them from differences in the operating environment. This comes on top of the big disadvantage of providing a smaller domestic market which has pushed a number of New Zealand companies to re-base their headquarters in Australia.

This cannot be sorted out simply by New Zealand adopting Australian laws. The imperatives are different and in some cases New Zealand law is demonstrably superior: GST is a prime example. Many economists argued that New Zealand competition law (which was aligned with Australia's in 2001) was superior - and Australia's review might take it towards the old New Zealand approach.

Tax is Cullen's primary focus - but not the headline company and personal tax rates. He wants to restructure international tax so that local companies can raise capital equally easily in both jurisdictions and foreign investors see one market instead of one smallish one and an even smaller one.

At present there are significant differences in the tax treatment of foreign companies. Cullen says he has had a "clear expression" from Costello that he wants a "significant" move to bring the two regimes closer together by mutual action.

The annual Finance Minister/Treasurer meeting has been a long time coming. The trade ministers meet annually. In a number of portfolio areas New Zealand ministers join, and sometimes host, the annual meetings between the federal and state ministers.

And in one area the countries have gone supra-national, with the Food Safety Authority of Australia and New Zealand, the joint food safety standards authority. Negotiations are well advanced on a joint therapeutics regulatory agency and Sutton is a keen advocate on more such agencies for technical regulation (see article, Business Herald).

Sutton is also keen to keep businesses involved. The Australia-New Zealand Business Council fell into disrepair on the other side of the Tasman, so there was no lobby working on bureaucrats and politicians.

Sutton took a different tack last year, inviting to his annual meeting with Vaile in Christchurch specific companies from both sides of the Tasman to scan a couple of topics: dairy and IT. The two dairy industries are now co-operating to combat European subsidies. The ministers intend to repeat this approach at future meetings.

Ironically, CER was an Australian initiative, agreed with some trepidation by New Zealand business and Prime Minister Sir Robert Muldoon. The Australian move was out of self-interest. New Zealand was a large market for Australian goods, and manufacturers and politicians did not want an economic basket-case on this side of the Tasman. They thought CER would tone this country up.

Now it is in New Zealand's interest to tone CER up - and with much less leverage than Australia had.

* Email Colin James

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