How Open an Economy?

Does Trump’s toying with the US rejoining the TPP mean anything?

What Donald Trump meant by announcing that he wanted the US to rejoin the TPP left everyone a bit baffled. His withdrawal from the original deal was one of his first presidential announcements following an election campaign promise. His opponent, Hillary Clinton, was not an enthusiast either and there were doubts that the US Senate would have passed the agreement.

Given the chaotic way Trump is running his office, together with the uneasy trade war with China and others, it is hard to work out exactly what he thought he was doing. Was it part of a China containment strategy (one way of interpreting Obama’s interest)? Perhaps it was a platform for a trade deal with Japan? Was it that he has been heavied by some industry interests who regret losing the opportunities that the TPP offered them? He made the announcement during a meeting with politicians from agricultural states so maybe he was looking for increased agricultural exports. Or all of these?

Speculation was not helped by Trump claiming he would get a better deal than Obama. There are eleven others in the current TPP-11, each of whom has a veto on new members; some have already said the basic framework is not renegotiable.

A few days later Trump said he was not going to rejoin the TPP. The master of ‘the deal’ only wants bilateral deals where, presumably, bullying works better. Even Japan, the third largest economy in the world on some measures, is far from enthusiastic to lie down with the elephant by itself. His tweet implied that South Korea was already in the TPP; it aint. International negotiation via Twitter is not normal.

Serious negotiations with the US could not begin until after the treaty comes into force towards the end of 2018. By then US politics may be quite different. It is not impossible that the November US midterm elections will result in a Congress which is anti-Trump. Who can guess what its position will be on trade deals?

New Zealand’s response to Trump was cautiously welcoming given the possibility of better access for key food exports to the US resulting in higher US and world prices. But what would we have to give up in return? As Trump will find too, any deal involves domestic winners and losers and the need for a tradeoff.

The winners in a trade deal tend to be concentrated in a few industries (especially, in our case, primary producers). Today the losers tend to be diffused throughout the community. (This need not have been so true in the past, when particular industries could be almost totally closed down.)

The debate then becomes very uneasy. The potential winners have vigorous and vociferous lobby groups who argue the benefits of the deal to the country (they mean themselves). The remainder are not as well organised, suspicious of the pro-deal lobbyists, and fearful of change. Understandably so, for there has been a long history of promised benefits from economic change which were not noticeable to the population at large even if some interest groups did well out of them. The tendency to exaggerate the gains and not deliver is common enough to trump (er) any realistic assessment.

The fact is that the gains from most trade deals are quite small compared with the economy as a whole with direct returns similar in size to the biggest promised domestic investments that newspapers headline. From which you might conclude ‘why bother?’

One sort of answer is that trade deals are a part of the totality of foreign policy. Being active here – we punch above our weight in trade – gives us a role in international affairs which, say, being very ethical does not. (Arguably, we are able to be more ethical because trade deals give us extra international gravitas.) What would the prime minister be discussing with her European and Commonwealth counterparts (as she was at the time of writing) if trade was not a big part of her agenda?

But there are economic reasons for trade deals although they are harder to argue. Or, rather, there are fundamental reasons for an open economy; trade deals are a part of keeping us open in a changing world economy.

The fact is that the New Zealand economy has been open to the world since the arrival of the European in the late eighteenth century. It could not have been otherwise.

It is true that at times the economy has been less open. For 50 years from the late 1930s there were import controls and other restrictions which (partially) shielded some sectors from the world but increased the exposure of the export sectors. Had we been more open in 1966, when the wool price permanently collapsed, the adjustment would not have been as traumatic.

Were the world economy more static, the openness would not be so necessary. In 1966, around 60 percent of our goods exports of goods went to Britain; now it is more like 5 percent. Whatever story one uses to explain this, the fact is that we had to seek new markets and supply them with new products. The other markets want something in exchange – hence trade deals.

Could we not just stop seeking new deals and settle for what we have got? Such a strategy has severe risks as well as the foregoing of gains.

The biggest risk is that our existing markets stagnate or decline, as Britain has done. Moreover, an overdependance on a few adds to our difficulties if there is an international downturn. We were lucky to have done a deal with China just before the Global Financial Crisis for it was not hit as heavily. It may not be so shielded in the next one; it may even be at its centre.

We are overdependent on the Chinese market. I should like to see a deal with India but we are not high among their trade priorities and even their membership of the Regional Comprehensive Economic Partnership (there are 15 other countries including ourselves) may not lead to significant increases in market access. Fortunately there are other economies more willing to discuss deals, success from which will add to our market and product diversity.

Market access is especially valuable to us, because many countries actively use their domestic monopoly powers to depress the return on our exports. Better market access reduces the rigging and we get better prices. The immediate beneficiaries are, typically, farmers and rural areas, but depending on the way we manage it, the prosperity should seep through the whole economy. (If it does not, that is the fault of the economic managers, not of the trade deals.)

Of course, an open economy is open to technological change, opportunities and ideas. (For instance, by protecting our woollen carpet industry we failed to appreciate the threat of synthetic carpets and were astonished by the 1966 wool price collapse.) It is difficult to quantify these effects but we know that they are at the heart of economic development and growth.

The international economy is always changing; it may be entering a new phase indicated by Trump, Brexit and the European nervousness over migrant flows. Once the emphasis was to reduce protection in the interests, it was said, of the whole economy. It looks as if more attention will be given to specific domestic interests in the future. (A side agreement between Canada, Chile and New Zealand mentions special concerns of ‘sustainable development, gender, indigenous peoples, domestic regional economic development, small and medium enterprises, labour rights, the environment and climate change’.)

All this is not to resile from an open economy strategy but it is to avoid an uncritical approach to openness. All our governments, including the early Labour ones, were committed to the open economy while trying to adapt it for domestic circumstances and maintaining and enhancing economic sovereignty. This one will be no different.

I am less sure about Trump. My guess is that his views – insofar as they are coherent – will not prevail, but that, even so, they may be harbingers of the next phase in international economic relations with its greater sensitivity to domestic interests.