Costs to New Zealand have not gone down with US exit from Trans-Pacific Partnership — but rewards have.

Free trade agreements are at best suspect. That is not me saying this, it is Paul Krugman, his generation's leading trade theorist.

Krugman argues you should start as a mild opponent of any free trade agreement. Closely inspect the baggage they carry — environment and labour chapters, intellectual property, investor state dispute settlement (ISDS) and government procurement such as Pharmac. Start with a sceptical eye.

These add-on chapters are the costs of free trade agreements that are relatively obvious to the untrained eye. No technical economics is yet required to suspect that any trade agreement will be an opportunity for special interests on the right and left, unions and big corporations, to feather their own nest. Longer patent lives, more stringent enforcement of overseas copyrights, Pharmac buying more expensive drugs and so on, in return for tariff cuts in export markets.


But let us start with what is claimed as the benefits by the Government. In a TPP without the US, in about 30-years' time, as little as 0.3 per cent extra GDP and at most 1 per cent more GDP in sum will be generated. Less than one quarter of these modest gains over 30 years come from tariff cuts.

The rest of the gains are from behind-the-border changes from streamlining customs to investor state dispute settlement — never easy to quantify because even the most impartial spectators can disagree on whether these regulations are a plus or minus to begin with.

The 20 odd carve-outs and side letters negotiated by the new Government suggests most of this baggage should not have been loaded up to begin with.

The only time tariff cuts are suspect is when they are part of a free trade agreement. The reason is trade diversion. We have been on the rough end of trade diversion in the two biggest trade agreements to affect us.

When Britain entered Europe's common market in 1973, they stopped buying cheap New Zealand lamb in favour of expensive French lamb. The tariff revenue collected by the British on our lamb exports was converted into payments to prop up hopelessly inefficient French farmers. British consumers paid the same or more for lamb and there was no tariff revenue to collect.

New Zealand car buyers then got screwed by Closer Economic Relations. Instead of buying cheap Japanese imports and collecting a tariff, Holdens and Fords became cheap because they did not pay this tariff. Cars were not cheaper for New Zealand buyers, the tariff revenue went off to Australian car manufacturers as higher import prices to keep their hopelessly inefficient car plants open.

With the US out of the TPP we still have all the baggage from environment and labour chapters, intellectual property, threats to Pharmac, and ISDS. The costs have not gone down but the benefits have, because of the loss of the single biggest market.

Investor state dispute settlement has no place in trade agreements between democracies that have the rule of law where investors can take their chances in domestic politics just like the rest of us. Yes, there will be breathless populism from the left or right from time to time, such as recently over foreign land sales, but by and large foreign investment is welcome and gets a fair deal.


Developing countries offered to sign on to investor state dispute settlement because their own courts are corrupt.

Maybe investor state dispute settlement worked 50 years ago when investment in developing countries was tiny and handled by a few big players who might get picked on by politicians looking for a few cheap votes or more likely, a backhander to the Swiss bank account.

Now there is broad-based trade and investment in developing countries despite their corrupt courts and dodgy politicians. Many exporters and investors are willing to take their chances.

When the local politicians and bureaucrats get rough, investors have already factored that in by backing investments with high enough returns to compensate for these risks.

Tourists buy travel insurance and keep their eyes open; investors know the rules abroad are different and must be just as watchful.

Japan, Singapore, South Korea, Hong Kong, Taiwan and the other Asian Tigers, and now India too, achieved development miracles without investor state dispute settlement.

Extreme poverty dropped by about one third around the globe over the course of the TPP negotiations and far more than that in China so I think they are getting on pretty well without it.

Most of these points were lost in the debate on the TPP because too many of its opponents are driven by anti-capitalist or anti-foreign sentiments rather than cost benefit analysis. They would oppose a trade agreement solely about tariffs that lowered prices to New Zealand consumers.

Not every trade negotiation is successful. For some, you reach the point where you must walk away. More so because of all the baggage loaded into trade agreements in the last few decades.

There should be a hard-nosed benefit cost analysis. When the US was in, the TPP might have been worth the risk, just. More access to the US market may have made up for all the other baggage. Now the price has gone up, so much so we probably should not be signing it today.

Jim Rose is an economic consultant in Wellington.