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Are FTAs OK?

datePosted on 15:40, February 28th, 2009 by Pablo

The Feb 27 announcement that NZ and Australia have signed a Free Trade Agreement (FTA)  with the ten member Southeast Asian regional grouping known as ASEAN has been hailed as another triumph for NZ’s economic openness, especially coming at a time when protectionist and nationalising policies have re-emerged in response to the global market crisis now ongoing. Although Trade Minister Tim Grosser signed the AANZ-FTA agreement at the 14th ASEAN summit in Thailand, it was MFAT officials working under instruction from the 5th Labour government who sealed the deal (after 4 years of negotiations), and it is these officials who are now beginning talks with India on a bilateral FTA similar to the one signed last year with the PRC. Yet, amid all the self-congratulation by government officials and business leaders, the nagging questions remains: are such FTA’s always good for the average Kiwi?

Pro-trade advocates will say yes on three counts. First, increased markets for NZ exports means more jobs in those sectors as well as their subsidiaries and ancillary industries. Second, increased foreign investment opportunities for NZ firms will eventually increase dividends for Kiwi shareholders. Third, access to a wider range of import markets means more competition and lower prices for Kiwi consumers. But there is more to the picture than this seemingly positive sum outlook.

The AANZ-FTA, like the FTA with the PRC and the P4 FTA signed earlier by NZ with Brunei, Singapore and Chile, is more properly seen as a tariff reduction scheme. In the case of the AANZ-FTA, the goal is to reduce common tariffs by 96% by 2020, thereby paving the way for the development of a a EU-style common market along the Western Pacific Rim that can compete with the EU, the US and emerging giants like the PRC, India and Brazil. NZ estimates are that it will eventually enjoy a 99% reduction in tariffs on its exports to ASEAN while ASEAN members will receive an 85% reduction on their imports to NZ. With US$ 31 billion is ASEAN exports to Australia and NZ  and US$16.8 billion of Australian and New Zealand exports to ASEAN members in 2007 (75% of that volume being between Australia and ASEAN, with NZ exporting US$4.6 billion to ASEAN members in 2008)), the objective is to raise the flow of goods and services ten fold over the next decade. Tariff reduction is seen as the key to achieving this goal, as it will lower transaction costs and remove fiscal impediments to investment within the partnership.

The problems with this arrangement stem from the asymmetries in the respective economies involved, from the lack of “after-entry” provisos, and from the dubious character of some of the regimes involved. With regard to the latter, the AANZ-FTA includes Myanmar and Brunei, two despotic regimes whose trade reliability and fiscal responsibility, much less human rights records, are open to question. It includes Thailand, which has the appearance of a politically failing state where sex tourism weirdness competes with highly exploitative labour-intensive low-cost production as the primary source of GDP, all amid grave ethnic conflict in its southern regions. It includes Laos and Cambodia, two states that barely meet the criteria for inclusion in a globalised trade regime. Its leading members, Singapore, Indonesia, Malaysia and the Philippines, have issues of political and/or corporate governance (be it in a lack of corporate transparency and/or a lack of political accountability), and the remaining member, Viet Nam, is a one party authoritarian regime that, if not as retrograde as Myanmar, has yet to exhibit the developmental potential of some of its most proximate neighbours. ASEAN is, in other words, a polyglot of corruption, nepotism, economic underdevelopment and exploitation mixed with crass materialism and indifference towards basic human rights and civil liberties in a highly charged ethnically diverse and stratified demographic, with a profoundly unequal distribution of resources and reliability amongst its members. Is that what NZ wants in terms of preferential trading partners?

Not surprisingly, the AANZ-FTA, which is due to go into effect on July 1 2009, has no common labour standards, including provisions regarding collective bargaining, right to organise, female and child labour, occupational health and safety and quality control. It has no environmental clauses. All of those are left to the industries involved. The Fontera PRC subsidiary’s Melanin scandal gives an indication of what can happen when such is the case.

Then there is the issue of size asymmetries and economies of scale. Is it plausible to think that with Australia coupled to NZ on one side of the AANZ-FTA ledger, NZ is going to be an equal beneficiary of the new tariff regime? If Australia turns out to be the major focus of ASEAN trade, will that not accelerate worker exodus and capital flight from NZ to Aussie under the terms of the CEP? Is it plausible to believe that with the lack of labour and other standards, NZ businesses in a variety of value added or service sectors will not have an incentive to re-locate their workforce in ASEAN countries where wages and benefits are lower? Is it plausible to think that NZ, with an export base in relatively inelastic primary-good industries and their derivatives (say, milk powder or paper pulp) will enjoy an equitable balance of trade with more elastic value-added importers? Is it plausible to think that foreign investors will not use the opportunity provided by relaxed investment regulation to assert direct control over NZ productive assets (which is an issue that also is at play with regards to the FTA with the PRC)? What NEW productive activities will actually  be created in NZ that will help diversify the economy while providing new employment opportunities that require so-called “knowledge-based”  skills? (For an earlier discussion of the problems of asymmetric trade, with specific regard to the PRC FTA, see http://scoop.co.nz/stories/HL0803/S00263.htm).

These are the questions that need to be asked in the parliamentary debates leading up to the July 1, 2009 ratification date. It is important that the Greens and other groups with concerns about FTAs avoid the appearance of knee-jerk protectionism that they have been saddled with in the past (as was the case with NZ First). Instead, the emphasis must be on the hidden “F” in an FTA–the FAIR aspect of trade, which for a small democracy such as NZ is as important as its free aspect. After all, free trade is not necessarily synonymous with fair trade, and it behooves the political Left to make that point since no one else (to include Labour) will.

3 Responses to “Are FTAs OK?”

  1. reid on February 28th, 2009 at 17:54

    Personally I’d like to see moves toward creating an FTA with the BRIC alliance but I guess with China already and India coming on board that may happen anyway.

    In terms of FTA or not, my feeling is that while I’m not a huge fan of globalisation, it can’t be stopped. Therefore the only realistic thing to do is to make the best possible arrangements. (Pablo, I know you weren’t suggesting they should not be done at all, and I just wanted to clarify my own base position on the matter.) So the only real question is, what is the best possible arrangement?

    Looking at us, our economy is more open and exposed than most, for a very good core reason: our small population. This means we don’t have a large enough domestic market to support our desired lifestyle. To a large extent this leaves us little choice but to engage in trade.

    NZ has depended on international trade since pakeha came along. (I realise Maori traded internationally prior to that, but they did not depend upon it to sustain their lifestyle.) To an extent that verges on necessity, trade is in our genes. The reason our economy is more open than most others (i.e. tariff-free) is because of our relative size. To us, on balance, it’s a lessor evil to expose ourselves to say, cheap manufactured goods from a trading partner, than it is to have high tariffs on those goods and no trading partner.

    The thing that’s new in this equation is the offshoring phenomena, which means these days, we export jobs to our trading partners. The question to me is, does this change the fundamental rationale that’s seen us through good times and bad since 1840?

    To me, the jury is still out on that question. One thing however I believe, is that while it possibly might, it’s not necessarily a fait accompli. It depends on which jobs go and also, upon whether we can develop our own inshoring industries to import jobs from our trading partners.

    Re: the Fair Trade question, it’s an interesting one that we briefly traversed with your Singapore post pablo.

    When we’re talking trade between nations, this is a different arena than interactions between individuals. Because of this I’m not sure you can or should apply the same measures of ethics that you apply at an inter-personal level. In an ideal world of course, you would be able to, but this is not the world we live in. For example, take this extreme example which I raise merely to illustrate the point. If the nation was to starve unless we traded with a brutal despot, should we? Which is the lessor evil? I’m happy to answer that question on behalf of myself. The answer BTW, is no. However, how would the rest of you feel if you had to suffer those consequences? That’s the difference when you’re considering the national implications of Free Trade or of Fair Trade. It’s not just your own personal perspective that’s at stake here.

    Like most legal situations, trade and commerce are treated largely as amoral activities with the proviso that certain activities are off limits. In other words, if it’s not banned, anything goes. The question is, what do we ban? (I’m not talking about what other nations decide to ban, I’m talking about what we choose ourselves to ban. For example, the NZ super fund has decided not to invest in certain defence technologies like land mines. Fair enough.)

    At this moment I’m of the view that we need to explicate a set of nationally agreed principles of engagement and if necessary enshrine them in the constitution. Those principles should include those practices we will not tolerate as well as those we will. The currently undefined and un-debated situation needs to be clarified and agreed as more and more globalisation issues greet us.

    It would be an interesting debate. I for example would have no problem with setting up an FTA with Iran but would have problems with doing one with Israel given its recent (last 10 years) behaviour.

    My apologies to all those readers who expected a more direct answer to the questions raised by the post.

  2. RedLogix on February 28th, 2009 at 19:19

    The real problems with FTA’s is not the trade in goods, but the trade in services that often piggybacks along with them.

    That kind of deal, directly destroys well-paid jobs in the more affluent country.

  3. Pablo on February 28th, 2009 at 20:18

    RedLogix: Agreed, with thanks for the clarification.

    reid: Also agreed on your third to last paragraph. There are plenty of corporate responsibility guidelines that could be used/modified/reformed/expanded to cover national trade strategies. The trouble at the moment is that, in spite of the abject failure of finance-kapital led unregulated market growth, NZ is still locked in a “market-first’ mentality in which the unfettered pursuit of profit dictates national macroeconomic policy (of which the approach to trade is part). Hence, you and I would be laughed out of a National/ACT forum were we to propose such a standard, even if we tried to explain that from a realist premise such standards are more conducive to long-term growth (at a moderate pace) than precipitous entry into FTAs with unreliable partners. After all, a regime that murders and imprisons its own citizens for expressing dissenting views, or condones abuses of basic human rights in pursuit of “growth,” may not exactly be trustworthy when it comes to it upholding its promises over the longer term–should it be around for a longer term (which brings up the question as to whether successor regimes will honour promises made by dictators or instead demand compensation for foreign corporate excesses during the despot’s tenure). Returning to a theme in a previous post, I think that it is possible to be both principled AND pragmatic on issues of trade as well as security. But for that to happen there needs to be robust parliamentary debate informed by informed public interest, which at this juncture appears to be a remote possibility.

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