New Zealand Must Grow Up In Trade Matters

New Zealand’s involvement with the rest of the world, in trading and economic terms more generally, has always been atypical.  For the first century or more of European settlement, the country developed as an economic appendage of Britain.  Virtually all of our trade took place with Britain; they took almost all of our primary production, in return for which we offered preferential access for British manufactured goods.

But that cosy pattern, which meant that we did not have to worry too much about trade agreements and markets, was disrupted dramatically by two major developments in the 1970s and 1980s.  First, Britain joined what was then the Common Market, and was accordingly obliged to play its part in reducing what was popularly called the “butter mountain” by buying expensive and otherwise unsaleable food in preference to our own more efficient production.  Secondly, and just as importantly (though with much less fanfare and public concern), Margaret Thatcher and Ronald Reagan agreed to remove exchange controls – a move which suddenly meant that the owners of capital could roam the world, looking for the best investment opportunities (which often meant the lowest labour costs or the most accommodating regimes concerning tax, labour laws, and health and safety requirements).

New Zealand suddenly found itself not only bereft of markets for its main exports but also a target for multinational corporations looking for safe investments and easy profits.  Much of our recent history in, and attitudes towards, international trade and economics is attributable to these two shocks to our system.

As luck would have it, these changes in the international context took place at the same time as a domestic economic revolution was under way.  “Rogernomics” not only swept away subsidies and elevated the unfettered market to an unchallengeable status at home; it took the same “free market” ideology into the international sphere.  The counterpart to the “free market” domestically was “free trade” internationally.

So, we took with us, as we looked for markets to replace those we had lost, a commitment to aggressively dismantling tariffs – and, in order to show our ideological commitment to the principles of free trade and free markets, for which we were receiving plaudits from right-wing commentators around the world, we proceeded to remove unilaterally our own tariffs and protections for our own industries without bothering in many cases to get anything in return.  This naïvete – there is no other word for it – was to cost us dearly.

It colours still our attitude to free trade.  In the absence of the managed trade we enjoyed as an economic colony of Britain, and unable to find a suitable replacement for that cosy arrangement, we became obsessed with the need to reach trade agreements with all and sundry.  The signing of each new deal was represented as a return to nirvana; the emphasis was always on the boost each new deal would supposedly mean to our exports and economic growth, with virtually no account taken of what free access to our market for powerful competitors would mean for domestic production.

The excessive value we placed on new markets led us to count our chickens before they were hatched and to treat as achieved realities what might only be distant prospects.  “Free trade” agreements were sold to the general public by listing, long before they had materialised, the supposedly long lists of manifold benefits to our exporters that would be delivered. The recent TPP negotiations, for example, were constantly justified by the confident and repeated expectation that a TPP agreement would provide us with tariff-free access to the US market for dairy produce.

Such a prize would certainly have been worth a good deal, but our naïve optimism on this score should surely never have survived the repeatedly stated determination of the American dairy industry to resist any such concession.  As it happens, that mirage has been swept away in case, at least for the time being, by Donal Trump’s decision to have nothing to do with a TPP.

None of this means that we should turn our backs on free trade.  The case for free trade in principle is as strong as ever.  As Adam Smith and David Ricardo argued, it is free trade that allows each economy to concentrate on what it does best, that encourages weaker and smaller economies to trade successfully with stronger ones, that means that there is a constant stimulus to greater efficiency and innovation, and that develops economic bonds between countries which support the general comity of nations.

But, as always, arguments in principle need to be tempered by what is known or foreseen as to practical realities and consequences.  Free trade between a stronger and a weaker economy can all too often mean that the stronger simply reinforces its advantage while the weaker slips further behind.  All depends on the stage of development of the economies concerned.

Most of the world’s economies have at some stage in their development recognised that some protection for their own domestic industries is needed.  Japan is a case in point.  In the course of re-building Japanese industry following their disastrous defeat in the Second World War, Japan did not hesitate to use tariffs and other non-tariff protections (such as an under-valued yen) to give their industry the chance to build its strength.  It was only once they could be sure that Japanese industry was big and strong enough to be internationally competitive that they became enthusiasts for and practitioners of free trade.

In New Zealand, however, we have blithely ignored such reasoning.  We have rejected any notion that we might not be a fully developed and internationally competitive economy and have wilfully saddled ourselves over long periods with an over-valued currency.  If we insist on committing to free trade for ideological reasons, we should at least have enough sense to give some weight to the foreseeable and adverse practical consequences.

Our naïvete in these matters has become even more evident when we have attempted to negotiate trade agreements, and have discovered that our premature and unilateral disarmament in matters of protection has meant that we have literally nothing to offer in return for the improved access to other markets that we seek.  Trade partners that already have free access to our market see no need to offer us concessions in return for concessions we have already granted to them.

Nor does it stop there.  With the development of the global economy – the direct consequence of the free movement of capital engineered by the Thatcher/Reagan ending of exchange controls – we have discovered that our economic relations with other economies are not limited simply to matters of trade.  In such a global economy, the price we are asked to pay for trade (and, more particularly, investment) can extend well into the domestic policies we wish to apply.

A good illustration of this point was the demand made by Warner Bros that, if we wanted them to make films in New Zealand, we would have to change our labour laws, so that the people they employed were not to be regarded as employees with all the rights and protections provided under our law to employees, including the right to belong to a union, but should be treated instead as independent contractors, negotiating individually with the US film company.  To the great shame of our then government, the law was changed to suit Warner Bros.

We can see the same demonstration of the imbalance of power between our government and foreign corporations displayed on a much wider canvas.  There was much celebration when a free trade agreement with China was signed, and there is no doubt that improved access to the Chinese market is of considerable benefit to our exporters.

But we have been very slow – and reluctant – to recognise that our economic relationship with China looks somewhat different when seen from China rather than from New Zealand.  For the Chinese, quite self-consciously on the way to becoming a global super-power, merely being able to buy our production is not enough.  A true super-power, they feel, must be able to guarantee access to the products it needs.  It should not have to rely on doing trade deals, or bidding in auctions – what is needed is not the power to buy a product produced by someone else, but the power to own and control the means and process of production itself.

So, the Chinese interest in us is not that they want to be able to line up and compete with other customers to negotiate purchase arrangements for our dairy products.  Rather, they want to acquire and control the production itself.  Hence, we see the Chinese interest in purchases of dairy farms, the construction or purchase of dairy factories and the marketing by Chinese agents of dairy products made in New Zealand directly into the Chinese market.  Their purpose is not to develop a trading partner, but, in effect, to incorporate the New Zealand economy (and particularly the dairy industry) into the Chinese economy.

It is not just the Chinese government that has this goal in mind.  Chinese companies doing business abroad invariably act as arms or agents of the Chinese government.  Virtually all business deals with Chinese companies will be, in effect, made with the Chinese state.  None of this means that we should avoid doing business with China but it does mean that we should be aware of what really is at stake.

A further example of how extensive are the obligations we undertake when we negotiate what may appear to be a simple trade deal is the Trans Pacific Partnership.  That Agreement has long masqueraded as a “free trade” deal but, under it, foreign companies can insist, to the point of forcing our government to change the law in New Zealand, that they should have a “level playing field”, by which is meant that we must ensure that their profitability and successful operation is not adversely affected by any legislation we pass.

So, for example, an attempt to restrict the sale of cigarettes or to make the business less profitable could land our government in court, before a specially constituted tribunal.  The government would be similarly open to attack if it used its power to negotiate agreements with foreign suppliers that would reduce their profitability.  So, Pharmac’s ability to use its monopsonistic purchasing power to hold down the cost of imported pharmaceuticals could be litigated by foreign pharmaceutical companies before those same tribunals.

The current government claims to have restricted the range of these provisions in the TPP so that they are not such a threat to our sovereignty and democracy, but only time and practical experience will tell us if that is so.  Even setting aside the specific provisions of a TPP, however, there is no doubt that – for a small economy – getting into bed with powerful foreign corporations is fraught with danger, and almost inevitably raises the possibility of a loss of our power to decide important matters for ourselves.  Those corporations almost invariably want more than the goods themselves; they want to guarantee that they have the rights and protections that are properly available only by decision of our government.

Without selling ourselves unnecessarily short, it is surely prudent to recognise that – in making trade deals with larger entities – we are a minnow getting into a global tankful of sharks.  If we are to survive and prosper, we need to be much more hard-headed and understand exactly what we are up against.  We need a much tougher approach than we have seen so far if we are to avoid being bought and sold by those who see us as fair game.  If we are not careful, by the time we wake up, it will be too late, and – for the sake of “free trade”, we will have sold our unique productive capacity and assets to foreign owners and with them the power to ensure that the benefits they produce come to New Zealand, rather than to those foreign owners.

Bryan Gould

22 February 2018