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The Open Economy And Free Trade Deals

Brian Easton

It is difficult to see any option other than an open economy for New Zealand. But there are many possible open economies although we may not be able to choose some of them.

The open economy is an extension of Adam Smith’s principle that specialisation generates higher productivity. That is true for us as individuals, it is also true for nations. A small nation, such as New Zealand, cannot produce everything; neither can the largest nations in the world. Better to specialise in what it can do best and trade that output for what it cannot do nearly as well.

However the consequence of trade is a reduction in sovereignty. Specialisation means that one gives up some power over one’s life in exchange for something else – ideally a better standard of wellbeing. There is a parallel in marriage which involves a loss of personal sovereignty. When they marry, a couple judges that the advantages of the union exceed this loss (that is, if they are rational – the romantic are not always so). How important is this reduction in sovereignty is a proper matter for assessment of the balance between the gains and losses.

Marriages are governed by laws as well as by informal arrangements. Once upon a time trade did not require formal laws; perhaps it was more like one-night stands – what you see is what you get. But it soon became apparent that some regulation would reduce the transaction costs. Instead of arguing over the quantities involved, international standards for weight and measures and the like evolved in the late nineteenth century. New Zealand did not have to adopt them – the US has not done so to the same degree as the rest of the world – but it would be troublesome for our exporters and importers if they had to keep converting the local measures into international ones.

Of course the world economy keeps evolving. The falling costs of distance have made it easier to trade goods; the telecommunications revolution has meant services can be internationally traded too. Who, would have thought a couple of decades ago that you needn’t go to a bookshop on High Street to buy a book? (Answer: Jeff Bezos, the founder of Amazon.)

A cheap way to set up a contextual framework, such as international standards, is through the nation state. Corporations could do it, one supposes, but they would have to be monopolies to be effective. Oops – better to have the state monopoly. And in principle no state can enforce its monopoly outside its borders. Hence the international negotiations of which free trade agreements (FTAs) are the most prominent outcomes, although there are numerous other conventions.

Their name suggests that they are primarily about ‘freeing’ up trade (the ‘f’ could stand for facilitating since the agreement may also cover management at the point of entry). But as they are dismantled artificial barriers to trade at the border are becoming less important, with the exception of some very high ones against certain farm products. Because agricultural exporting is important to New Zealand, we tend to pay a lot less attention to everything else.

In any case trade is no longer just goods, some services can be traded and intellectual property is internationally mobile. For many purposes foreign investment is just trade over time so rules for that become as necessary – or more necessary – as for instant trading. The negotiating agenda has moved on.

Not everyone wants to be a part of it. Some countries choose to opt out. New Zealand has chosen to opt in, always in the hope that we shall make some progress on the removal of agricultural restrictions, (and we do, we do, but oh so incrementally).

The catch is that an FTA involves agreements between nations. In order to get a deal it is necessary to make concessions. Because the deals are no longer only about barriers at the border the concessions can be behind the borders. Nor are they simply ‘I’ll reduce this tariff if you reduce that one’. The trade-off may involve ‘I’ll give you better agricultural access if you adopt these parts of my intellectual property law’. (And it is so much harder if the deal involves a behemoth and a midget.)

As has been widely noted, the agreement from the Trans Pacific Partnership (TPP) is not a simple free trade deal if that is defined as being about artificial barriers at borders. Its 6000 pages make it extremely difficult to evaluate. It is easy to identify provisions which are detrimental to New Zealand and ignore some extremely advantageous ones, or vice versa. The New Zealand government has to look at the whole deal. Because there are downsides some people will be worse off. To what extent do their interests need to be taken into consideration? Can we do anything to ameliorate the downside? Should we? (In principle the benefit from the gains from the deal should make such compensation possible, but those who benefit from the deal are unlikely to want to share their benefit or even recognise there are losers.)

Winners and losers aside, there is perhaps an even greater challenge in the changing power balance. Summarising the impact of the TPP, American economist Jeffrey Sachs argued that the deal can be split into four components one of which is

… a set of regulations governing investor rights, intellectual property, and regulations in key service sectors, including financial services, telecommunications, e-commerce, and pharmaceuticals. These chapters are a mix of the good, the bad, and the ugly. Their common denominator is that they enshrine the power of corporate capital above all other parts of society, including labor and even governments.

These corporations are operating through the (mainly) American and Japanese governments but there is an interesting extension to the sovereignty argument here. One of the effects of the increasing use of the market to regulate the economy in particular and thereby society generally is to move power from the nation state, or at least the democratic nation state, to the corporations. This is a loss of democratic sovereignty which is not strictly about FTAs but a more fundamental feature of the shift to market regulation domestically as well as internationally. However, that loss is intensified and internationalised by the extensive form of FTAs.

In the short run the government probably has to implement the provisions of the TPP. It cannot back down. It is not just its domestic political credibility in New Zealand that is on the line were it to walk away from the TPP, while certain sector groups would lose real benefits (to them). More fundamentally, all our partners in the other free trade deals we are negotiating would pull back because they could not trust the New Zealand government to deliver. (We are never high among their priorities anyway.)

International trading deals are not going to go away. And we are left contemplating just how much sovereignty and what sort of sovereignty we are willing to sacrifice to get the benefits of economic specialisation. What sort of open economy, of those available to us, are we going to choose?

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Brian Easton
About the author

Brian Easton

Economist
Brian Easton is one of New Zealand’s leading economists with a unique profile as an economic development practitioner, consultant, journalist and commentator. A former director of the New Zealand Institute of Economic Research and a one-time member of the Prime Minister’s Growth and Innovation Advisory Board Brian has numerous awards to his credit including being a distinguished Fellow of the New Zealand Association of Economists. Dr. Easton is an adjunct Professor of the Auckland University of Technology and is currently writing a history of New Zealand from an economic perspective, Not In Narrow Seas: A Political Economy of New Zealand’s History to be published by Otago University Press.