Submission on international treaty select committee examination of the UK trade agreement

I am submitting in my personal capacity opposing the agreement. To quote John Cochrane on how long free trade agreements should be:

Nafta and the like are often called “free trade agreements.” Economists like me wonder, why does that take tens of thousands of pages? “We do not charge border taxes (tariffs), nor restrict quantities, nor will government purchases favor American companies.” “We do the same.” Done. That’s free trade. This little snippet reminds us what trade pacts really are.

Free trade agreements (longer than a few sentences) are at best suspect. That is not me saying this. That is Paul Krugman, his generation’s leading trade theorist. Krugman argues that 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 the left, both 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 about 20-years’ time, the agreement will boost New Zealand’s annual real GDP by between NZ$710 million and NZ$811 million (0.10% – 0.12%) relative to the 2040 modelled baseline. A tiny amount.

The gains from behind the border changes are never easy to quantify because even the most impartial spectators can disagree amongst themselves on whether these regulations are a plus or minus to begin with, so they cannot agree on whether reducing or increasing them are a plus or not.

The only time tariff cuts are suspect is when they are part of a free trade agreement. The reason is trade diversion. A technical concept which MFAT does not know about because I received a nil response to an Official Information Act request about their TPPA advice to ministers about the costs and benefits including any reference to trade diversion. Trade diversion in not mentioned in the national interests analysis of the UK agreement.

We have been of the rough end of trade diversion in the two biggest trade agreements to affect us. When Britain entered the Common Market in 1973, they stop 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.

Thankfully, there is no investor-state dispute settlement chapter in the agreement. Investor-state dispute settlement has no place in trade agreements between democracies. They 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 managed to have development miracles without investor state dispute settlement. Extreme poverty dropped by about 1/3rd around the globe over the decade or so course of the TPPA negotiations and far more than that in China so I think they are getting on pretty well without it.

Most of these points are lost in the debate on the TPPA because too many of its opponents are motivated 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 up into trade agreements in the last few decades.

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