Trade talks vital, but benefits vague
Trade is the lifeblood of the New Zealand economy. By tapping into overseas markets, New Zealand firms can gain economies of scale that are not available when selling to a domestic market of just 4.4 million people.
International competition exposes New Zealand firms to new technologies and ideas that can improve productivity and profitability. Trade also allows us to specialise in goods and services that we are comparatively good at, and to use export revenues to buy imports from countries that can produce them at a more competitive price. This boosts households’ purchasing power.
Given the importance of trade to the New Zealand economy, getting our trade policy right is vital. Negotiations are currently underway with eight countries – including the United States – in the Trans-Pacific Partnership (TPP), as well as the Republic of Korea, India and Russia, Belarus and Kazakhstan.
New Zealand’s early trade negotiations were mainly about removing or reducing trade barriers at the border. Outcomes were fairly easy to evaluate by identifying the gains from exports as tariffs fell or quotas expanded, and from lower import prices.
Modern trade agreements have a broader focus and are more difficult to assess in monetary terms. They are more strategic in nature and focus on helping Kiwi firms participate in supply chains that span many countries. In a world of multi-country supply chains, the impacts of trade barriers (and hence the benefits from reducing them) are more nuanced. As well as tariffs, costs arise from clearing customs, meeting quality and environmental standards, meeting rules of origin requirements and abiding by local regulations. The more times a part-finished product crosses a border, the more these costs mount up, and the more expensive the final product becomes.
Services trade faces a different set of barriers to trade in goods. Barriers are in the form of visa restrictions and state-legislated preferences for local suppliers, for example.
On the investment side of things, international trade is now dominated by multinational corporations that operate in in many countries. The ability to set up subsidiary offices in key markets is important for these companies, as is the ease with which they can expatriate profits. Regulations in many countries restrict investment flows and countries have differing views on the appropriate balance between the protection of foreign firms’ intellectual property and the ability of domestic firms to imitate and sell those products.
Some of the restrictions are legitimately required for reasons of national security, protection from imported diseases and food safety, for example. But they create complexity, costs and uncertainty, all of which are the enemy of New Zealand firms contemplating entering foreign markets - a difficult enough task as it is given our geographical isolation.
Reducing these barriers is therefore a key objective for New Zealand trade negotiators.
As the negotiating end-game nears for TPP and other agreements, New Zealand officials and ministers will be faced with some difficult trade-offs. Lobby groups opposed to liberalisation have already started to paint some apocalyptic pictures of what might happen to the New Zealand economy if the ‘wrong’ choices are made. An example is the concerns portrayed about increased medicine costs for Kiwis if Pharmac’s role is amended as a result of the TPP negotiations, despite ministers providing assurances that “the fundamentals of that model are not up for negotiation”.
To provide a balance to some of the more alarmist rhetoric, there is a need for greater analysis and communication of the potential benefits to firms and households from TPP and New Zealand’s other trade agreements. Given the complexity of modern agreements, estimating monetary estimates of these gains won’t be easy. But doing so is important to help Kiwis understand why these negotiations are so important.
Jean-Pierre de Raad is the Chief Executive of the New Zealand Institute of Economic Research.
NZIER is an independent economic research and consultancy group. Part of its responsibility as a non-profit Institute is to promote debate on New Zealand’s economic challenges