Free Trade and Blind Faith

What’s not to like about free trade? Trade is obviously a good thing, and free trade must surely be better than the alternative? So convinced are New Zealanders of its merits that the “free trade” label need only be attached to this week’s talks about a Trans Pacific Partnership to persuade us that a successful conclusion would be an unalloyed blessing. Yet the actual basis for this touching faith has almost never been debated.
Ever since British membership of what was then the Common Market ended well over a century of managed trade, and Rogernomic fervour persuaded us that the “free” market would always produce the best results, it has been an article of faith in this country that free trade is the only way to go. Yet other developing countries (and who is to say we are not one?) have almost always seen the advantages of protecting nascent and vulnerable industries against the full force of competition from more powerful economies.
We, however, have approached the global marketplace as a child would a candy store. With astonishing naivety, we have optimistically and often unilaterally removed tariff and other trade barriers, confident that our trading partners would also one day see the light, and that our tiny and vulnerable economy could in any case prosper in direct competition with some of the largest and most efficient economies in the world.
Each new step towards free trade nirvana is celebrated and justified by pointing to the increased exports that increased free trade will bring. No matter that our trading partners only buy our goods because they want them – and in a world short of food that is likely to become even truer, as witness the proprietorial interest the Chinese are showing in our dairy industry.
No matter that the claimed increase in exports seems to owe little to the presence or absence of a free trade agreement. The sharp rise in our exports to China, for example, had already happened before our free trade agreement had time to take effect this year.And no matter that, in virtually every case, the increase in exports has been more than offset by a sharp increase in imports, with consequent damage and in some cases actual destruction of domestic industries. We are so dazzled by the prospects of export growth that we are ready to take any risk and make any concession.
If free trade were really as beneficial as is claimed, why have we endured our perennial trade imbalance over such a long period? And do we understand that free trade arrangements are not just about trade, but are really designed to produce an integration of economies?
A free trade arrangement operates very much like a single economy. If the whole of the combined market can be accessed without any restriction from any point within it, why would anyone manufacture anywhere else but the most populous part of the market and the most efficient or low-cost manufacturing centre?
That invariably produces a concentration of skills, resources and capital in the most efficient parts of the single market, and that does not usually include small marginal economies like New Zealand – just ask the Greeks or Irish or Portuguese.
And it is not just tariffs that have to be aligned. Anything that could be argued to upset the “level playing field” will not be allowed. As others have discovered before us, a free trade agreement with the United States, for example, would mean that our cooperative marketing of dairy products or kiwifruit through a “single desk” like Fonterra or Zespri would be targeted as an unacceptable distortion of trade.
A monopsonistic purchaser like Pharmac, which has saved us millions of dollars, would be attacked as inimical to the “free” market that the major pharmaceutical companies would want to exploit. And across the board, any attempt to give priority to local suppliers would be outlawed.
If the Trans Pacific Partnership follows, as American “free traders” have assured us it will, the model provided by the North American Free Trade Agreement, there are yet more far-reaching consequences in store. A NAFTA-style arrangement would give individual companies the power to enforce rights against our government in specially constituted international tribunals, even if those rights were not available to our own firms.
This is an international agreement of an unusual type – one where individual corporations have the same rights as governments. Those rights could include exemptions from domestic obligations in fields like health and safety, or concessions on tax treatment, or preferential treatment when it comes to awarding contracts, or relief from attempts to protect the local ownership of assets. Even if our own government – perhaps a government of the future – wished to change domestic law in these respects, foreign corporations could still enforce their rights under the “free trade” agreement.
There is no reason why a sensible trading relationship should not benefit both parties. There are many situations where free trade is appropriate. But we would be foolish to go on, as we have done for 25 years, taking on trust that the “free trade “ label is the only safeguard we need.
Bryan Gould
5 December 2010
This article was published in the NZ Herald on 7 December.