Rethinking Trade Policy.

We don’t need to refresh trade policy; we need to rethink how best to engage with the world in the context of increasing globalisation. 

The Government is ‘refreshing’ its international trade strategy. Refresh is a euphemism. It ought to overhaul it. Here are some guidelines; I begin with the overarching framework.

The context is globalisation which seems to be as great a driver of economic, political and social change today as industrialisation was in the nineteenth century. Many see it as threat – as conservatives saw industrialisation. I see it as challenge – how are we to harness globalisation to the betterment of mankind in general and New Zealand in particular?

New Zealand has to engage economically with the world – sometimes it is called the ‘open economy’ strategy. But it need not be equally open on all dimensions.

There should be a minimum of restrictions on information flows (which is why I object to the copyright provisions in the TPP).

Aside from phyto-sanitary restrictions and the like we are going to have to be open to imports; we are going to be a specialist economy in international terms. However, that need not mean we should never foster an infant industry. At issue is how we do it and that the strategy includes the weaning of the infant.

I would be more restrictive on capital flows, favouring new foreign investment (which is not the same thing as being equally favourable to foreign purchase of existing businesses) and discouraging overseas borrowing (which has fuelled the housing market). I accept that some overseas purchasers of our exports will want to integrate back into domestic supply. The import of this paragraph is that we need to save more domestically – in the terminology of the left-Liberals of a hundred years ago we have to be more ‘self-sufficient’ in savings for investment. (More here.) 

We need to restrict immigration to the level we can absorb socially. We should not be using immigration to stimulate the economy, nor to provide the skills in which we have failed to train New Zealand workers (except for very short-term shortages – like those which arose following the Canterbury earthquakes). We should not have specialist immigration programs for the rich. The social absorption criteria are necessary because migration will change the ethnic balances and diversity of New Zealanders; something we should welcome. (More here.)

While there are a lot of upsides for the open economy, we also become more vulnerable to the downsides when the world economy contracts or the international financial sector panics. We have to prepare for that eventuality – another reason for building up our domestic savings.

What then should be our trade negotiations stance? First, we need to pursue strongly the enforcement of the agreements we have made. (Successful examples include the apple dispute with Australia and the lamb dispute. The 2016 Nairobi agreement which eliminates agricultural export subsidies and imposes disciplines on measures with equivalent effect is going to generate new challenges.) That means coming to the table with clean hands – not having cheated in other areas; bigger countries do not need to be so scrupulous. (More here.) 

Second, we need to reduce the institutional barriers to the flow of goods (such as border documentation) – the kind of things that APEC is concerned with but which are also unmentioned but vital parts of most trade deals

Third, we need to play our international part in the consolidating of trade deals – trying to reduce what is called the ‘noodle bowl’ of bilateral and plurilateral deals to a set of fewer and more consistent ones. (Plurilateral is when there are a number of economies involve but not all of them.) Another multilateral (i.e. everyone that matters) ‘Doha’ round would be super; but we are not going to get one in the planning future.

Fourth, we should continue to pursue the currently proposed bilateral and plurilateral deals but not expect too much from them.

Fifth, we need to take more care about compensating losers when we do a trade deal.

The above is in the ‘refresh’ category. The ‘rethink’ is about moving away from a ‘comparative advantage’ approach to international trade, recognising that our model which underpins it is over-simple. It is partly that the standard caveats of free trade are becoming increasingly important: transition and adjustment costs are not negligible, the static gains are not sufficiently large to compensate losers. (These are the sort of issues which are causing so many in the US, including respected economists, to doubt the efficacy of trade deals.)

We also need to recognise that the standard models do not handle well any of the following increasingly important globalisation phenomena: competitive advantage, economies of agglomeration, the falling costs of distance, supply chains, tradeable services.

Comparative advantage has led us down a blind alley, where sometimes we get beaten up by thugs. Most conventional protection (such as import controls and tariffs) is becoming negligible. The major exception is foodstuffs – the sort of things we export. Many of New Zealand’s exports are cruelly discriminated against, not only to the detriment of the farmers but of the New Zealand economy as a whole.

It was the belief in comparative advantage which led to our unilateral abandonment of external protection in the 1980s and 1990s. It was a bit like taking all your clothes off at a picnic to encourage others to go nude. Others looked at what they saw and kept their clothes on – especially the agricultural tweeds – for it is really hard to show substantial gains from the nakedness.

Today’s consequence is that we have little to offer other countries in exchange for their lowering their foodstuff protection. That is why we had to accept the iniquitous copyright extension in the TPP in exchange for better access to the US and Japanese domestic food markets. (More here.)

So how are we going to get further reductions in the barriers our farm exporters face? We can, and probably should, continue to negotiate plurilateral (like RCEP) and bilateral deals (like with the EU) but we have not got much to offer and cannot expect much in return.

Instead, we need to think of new initiatives. Can we include in climate negotiation deals reductions in the barriers which face our farmers (but we need to resolve the belching cow problem). For instance, we are currently pursuing the elimination of subsidies on fossil fuels which will favour renewable energies and conservation measures – to New Zealand’s advantage.

But we are also pursuing the elimination of subsidies on fishing. That is an honourable green objective – even if it is against our long term interests because the world fishing out its ocean stocks will make our fish managed under a sustainable regime (sort of) so much more valuable. (Here are the minister’s views.) 

Something which is not currently on the international negotiating agenda, but in my opinion should be, is a world food security treaty. Many countries protect their farmers to give themselves food security. In fact self-sufficiency in supply is not guaranteed. It would be far better to liberalise international food trade so when there is a shortage in one country supply would be diverted from others or from stocks. We need an agreement which would ensure this among signatories (probably with an agreed food stock strategy). It should also include an agreement that signatories would not use food sanctions against one another. (A similar prohibition against pharmaceutical sanctions would be a welcome add-on.)

It is a long shot, and will take years to implement but it is more effective than taking your clothes off at a picnic.

Finally, we need to move public discussion of trade issues away from the narrow elite to the whole public. My guess is that improving the information to the public, and gaining their confidence over what we can do, will require an independent research group on globalisation. Pundit columns are not enough.


PS. Many readers will have been moved by Dani Rodrik’s Put Globalization to Work for Democracies. While we may well aspire to these objectives as a part of our total strategy, a small country cannot do much by itself but we can pursue the strategy with like-minded countries.