Perspectives on the US economy after 8 months of Trump - NZIER Insight 71

11 September 2017

Bipartisan trade policy must be re-established to support Kiwi businesses, NZIER says

A new research note from the New Zealand Institute of Economic Research (NZIER) recommends a return to New Zealand’s long-cherished bipartisan trade policy that has been damaged in recent years’ debates over the Trans-Pacific Partnership (TPP).

“Kiwis’ living standards depend crucially on foreign trade and investment, so we need support for trade deals on both sides of the political spectrum”, NZIER’s Deputy Chief Executive John Ballingall said.

Labour isn’t anti-trade; but it is stuck on TPP and foreign investment into housing

“It’s not correct to say that the Labour party is anti-trade. It has expressed strong support for New Zealand’s aspirations to get free trade agreement (FTA) deals with the EU, UK and Pacific Alliance. That is encouraging”, he added.

However, Labour’s position on TPP rests on the issue of whether New Zealand should be able to ban existing house sales to foreign investors. This would not be permitted under the current TPP text. A ban is also not possible under the Korea-New Zealand FTA, the provisions of which now apply to the China FTA as well.

A ban on foreign investors is unlikely to do much for house prices…

“It is not possible for any New Zealand government to ban sales to investors from these countries without breaching our FTA commitments. Any such ban would risk blowback in the form of retaliatory trade or investment measures, which would be damaging for Kiwi businesses”, Ballingall added.

It is worth remembering that only 3% of house purchases are by foreign tax residents, so a ban would be unlikely to have any material impact on house prices. Why put New Zealand’s access to overseas markets at risk for such an uncertain outcome?

Even if you do think that restricting foreign investment into housing is a good idea – and Ballingall doesn’t – alternatives to outright bans that are more likely to be allowed by our FTAs, such as high stamp duties, might usefully be explored by Labour.  

… and will impose costs on New Zealand if FTAs are renegotiated

Labour could of course seek to renegotiate our existing agreements to try to get our FTA partners to agree to New Zealand having the ability to ban house sales.

“But there will be a price to pay if they did agree – there are no free lunches in any trade negotiation. It could mean slower tariff reductions on our key exports or tighter restrictions of New Zealand’s investments, for example”.

“This would not be helpful for Kiwi exporters or investors”, he warned. “It’s unrealistic to think that New Zealand can pick and choose which parts of existing FTAs to abide by, and which it doesn’t”.

Let’s learn from the US’s mistakes: politicians need to avoid creating uncertainty for Kiwi businesses…

Ballingall’s research note gives his personal reflections on a recent three-week visit to the United States where he saw first-hand US businesses’ concerns about President Trump’s isolationist approach to trade policy.

“The US economy is in good shape overall, which is good news for Kiwi exporters. But American firms and business groups were very worried about the administration’s volatile and incoherent views on US trade policy. This is knocking their confidence and putting investment plans on hold”, he added.

“We don’t want this to happen in New Zealand too. The geopolitical climate for trade liberalisation and economic integration is challenging at the moment in the US and UK in particular. New Zealand needs to stand strong and continue to push for a more open global trading environment that underpins better living standards for Kiwis.

… and position New Zealand well to be a nimble FTA opportunist

The note concludes that “there is a very real risk of throwing out the trade baby out with the sovereignty bathwater” on TPP.   
Ballingall hopes this does not happen. “Positioning New Zealand to take advantage of future economic integration opportunities will be easier if existing political differences over TPP and banning foreign investors’ purchases of houses can be solved, and a return to bipartisan trade policy is achieved”, he said.