Free trade deals can be complicated; so is their analysis.
We must celebrate the achievement of a Free Trade Agreement with India, but only the uninformed attribute its success solely to the current Prime Minister, Christopher Luxon, and to Todd McClay, the trade minister. The negotiations took a couple of decades involving many more politicians. Even less recognised – and more crucial – have been the diplomats who have been slugging it out over the years dealing with intricate details, spending their lives flying between the countries and in anonymous hotels. Salute to them too.
With a population smaller than even a middle-sized Indian City, New Zealand was never going to be in the forefront of candidates for India’s trade deals. Australia’s FTA came into force more than three years ago, and many larger countries have already settled too. We were not high on India’s list partly because we are tiny, partly because we have not had a lot to offer in exchange. That is why a major concession by New Zealand has been better visa access for Indian workers.
(When the neoliberals abandoned tariffs in the 1980s and 1990s, they gave up what could be traded in international trade deals. They thought there would be significant gains from the abandonment. There wasn’t. They expected other countries to see the benefits and follow suit. They didn’t. Their response has been likened to someone stripping naked, saying ‘follow me’. Everyone looks at the sight and puts on another jumper – in the case of Trump, full armour.)
One of the things holding up our deal was, as in the case of others we have negotiated, an unwillingness to give concessions to our dairy industry. We reluctantly gave up insisting on the inclusion of dairy (there are some very small concessions).
There is a view that this obduracy by India reflects the significance of cows in Hindu culture. The economic analysis is more insightful, relying on a more subtle interpretation of the ‘gains from trade’ analysis than the ideologists allow. The static theory shows that the elimination of protection increases effective output. That only results in an unequivocal increase in welfare if the losers are compensated by the winners.
Often the static gains from a trade deal are so small and the costs of the transfers to compensate losers are so expensive that the compensation does not happen except that the changes may be phased in, giving the losers time to adjust. But where the losers are numerous or politically powerful, their interests may block a deal.
Around 650m Indians depend on agriculture – that is more than there than the entire populations of any other country – China excepted. (India has an estimated 75 to 80 million dairy farms, which are predominantly small-scale, family-owned operations, typically with two to five cows or buffaloes.)
Well over 500m of rural dwellers suffer economic distress. India has no easy means of compensating them if its food sector was opened to international competition. Hence its reluctance to negotiate trade deals which compromise its farmers, even if the urban population would benefit – as it would have, had they access to high-quality, cheaper, dairy products.
The static economic analysis tells only a part of the whole story. There are two bigger benefits from trade deals. The first is international diversification. Currently, we are overly dependent on the Chinese market. We learned the lesson many years ago when we were overly dependent upon the British market. That went well when Britain boomed but when it suffered, the New Zealand economy suffered with it. We also found that economic dependency intensified political dependency. (China’s share of our exports is about half what was Britain’s share in the 1960s, when our dependence on it began to collapse – it had been even higher.)
Over the last twelve months, Trump has demonstrated that the world has been too dependent on the US. For some reason – the analysis of which defeats rationality – he has been been pushing everyone – New Zealand included – into China’s arms. India – the fourth largest economy in the world after China, the US and the EU – has become more responsive to trade deals as a part of this changing political economy. We, and many others, have been happy to take up the opportunity.
India is also keen to open its economy as a part of a modernisation. India focused on self-sufficiency when it gained independence. It is an easier strategy for such a large economy, but it failed to lift its productivity in the way that China lifted its performance, following Deng Xiaoping’s opening it to the global economy four decades ago.
The modernisation process depends on the circumstances of the economy, but underlying it there is the second reason for trade deals. Businesses in an open economy are under pressure to perform better because of competition from other international businesses; meanwhile, they are also given opportunities to perform better. (The reality means that poorly performing businesses wither.) These are the dynamic gains from a trade deal which, in the long run, are far more important than any static gains.
There will be resistance to the Indian FTA (as there is to every trade deal). As the economic analysis says, some will be made worse off. Others may object to the type of economic growth it will generate (for instance, it may put extra pressure on the environment) but that is really a matter of how we handle economic growth, not especially about an open economy.
The third doubt is that the open economy means a loss of sovereignty. All trade and exchange involves some loss of independence. You have less personal sovereignty if you get your veges from the supermarket. There is, however, a paradox in that an FTA which passes some sovereignty to India reduces the power of other economies, such as China and the US, over us.
The main leader of the resistance is likely to be Winston Peters. One is not sure how really serious he is. Is he merely trying to gather the grumblers under the New Zealand First umbrella? (One can think of instances where he did little in office to support the grumblers who voted for NZF.) Would he veto the deal if he could? Peters is widely optimistic if he thinks that he could take the current proposed FTA back to the Indians and make a significant change to it (without their extracting more concessions in return).
Labour is likely to support the deal when it comes before Parliament (although the other leftish parties will not). That is a consequence of the other, often ignored, side of negotiating a trade deal. There is always a considerable effort by the officials and the politicians to discuss the issue with domestic pressure groups and the Opposition. Labour has already probably indicated that it will support the deal while, of course, saying that had they been the government they would have negotiated a better one.
Were New Zealand significant in the world economy, the world would need a NZ-India FTA. It needs a more modernised India, as indeed do the poor of India who have seen a modernising strategy lifting hundreds of millions of Chinese out of gruelling poverty. The world, and New Zealand, need a more economically successful India to offset the economic power of China, the EU and the US. Four bullies are better than three.