TPP – are we really going to be better off?

As a social conservative, I’m instinctively queasy about an international treaty being signed in a casino complex.  As an economic liberal, I’m almost equally queasy about a major economic treaty, claimed to improve standards of economic policymaking etc, being signed in the flagship building of a company for whom our government not long ago did a constitutionally questionable private deal.

But, of course, the real issues about TPP have nothing to do with the specific place where the agreement will be signed.  What is in the 6000 pages agreement is what matters.

New Zealand –  like other countries –  would, of course, benefit from free trade.  That is now pretty widely accepted, but for a long time it wasn’t.  Oddly, Andrew Little claims that Labour has been a party of free trade since it first formed a government in 1935.  He seems to have forgotten the whole panoply of controls on trade and payments imposed by that very government, and substantially re-imposed by the next Labour government (1957-60).   Savage, Fraser, Nash, Nordmeyer and Kirk –  whatever their other merits –  simply weren’t free traders.

But it is now generally accepted that free trade is economically beneficial  (accepted as rhetoric –  even though we still have self-defeating tariffs in place ourselves which (no doubt very slightly) unnecessarily lower our own living standards). TPP does lower some tariffs, and provides somewhat greater access for some products to some markets.  Those look like worthwhile gains, but this is nothing resembling free trade.  Not only do many of the barriers remain high, but this is a regional deal. It is a standard result in the trade literature that regional deals can end up making countries worse off, rather than better off.   In its report last year on trade agreements, the Australian Productivity Commission –  no haven of economic neanderthals –  made that point very strongly.

Our government recently published its own National Interest Assessment of the TPP deal.  It argues that the trade dimensions of the agreement will make New Zealand materially better off –  nothing transformative to be sure, but on the face of it worthwhile gains.  But how credible is the argument?  I wasn’t persuaded.

The NIA is in the nature of an advertorial –  a piece written by and for those who agreed the deal.  Of course they are going to say that the deal is in the best interests of New Zealand, and no doubt they believe it.    But as others have pointed out, it relies on modelling that was done (a) before the agreement was even reached, (b) assuming that the tariff cuts all benefit New Zealand (rather than those who import the products we sell, and (c) without any detailed analysis of the impact of the liberalisation of the non-tariff measures in the agreement.  And there is no mention of trade diversion, or of the increased complexity of the system as a result of the proliferation of regional trade agreements.  Perhaps the effects are small, but the issues should at least have been addressed.

Others have argued that the overall gains to New Zealand on the trade front are likely to be exceedingly small.  Those arguments look to have some force, but also need expert evaluation.  Any judgement around the likely economic impact of the trade aspects of the TPP agreement would be more credible if they flowed from a detailed analysis undertaken by an independent agency.  I’ve argued previously that the New Zealand Productivity Commission would be a good candidate.

If there are overall gains to New Zealanders from the trade liberalisation dimensions of the deal, they need to be weighed against what is in the rest of the deal.

I’ve touched previously on a couple of concerning, or just puzzling issues (here and here).  In a future financial crisis, the TPP agreement requires countries considering using direct controls to preference all flows associated with foreign investment over any other financial flows (including those relating to an identical asset owned by a resident).  Existing multilateral arrangements still look superior, and more flexible, than what is in the TPP.  And the NIA’s section on the investment chapter of the TPP does not deal with these additional constraints at all.

I wanted to touch on just two other aspects of the agreement, the investor-state dispute settlement provisions, and the labour chapter

When citizens are discontented with their government, they can either lobby to change the government’s mind or vote to change the government.  In some cases, they may have redress through the domestic legal system.  Our courts are –  mostly –  open, impartial and competent.  We have established rules of evidence, bodies of precedent, and appeal processes –  heirs to hundreds of years of British legal development. We even have processes for, in extremis, the removal of judges for serious misconduct.   Individuals and companies can both lobby governments.  Where judicial remedies are open, both can seek to exercise them, regardless of whether the companies are owned by New Zealand or foreign shareholders.   Companies can’t vote of course – whether New Zealand ones or foreign-owned ones.

It seems like a pretty good system.  It seems to have worked.  So why have governments been signing up to arrangements that allow  alternative remedies specifically for foreign investors?  TPP represents a substantial extension of the possible number of such suits (even if some of the procedures appear to have been improved from some of those in earlier agreements). To be clear, a foreign-owned company in New Zealand will have different remedies open to it than a New Zealand owned company operating in exactly the same business in New Zealand (and it is symmetrical: a New Zealand owned firm in the US would have  different remedies available to it than a US-owned firm doing exactly the same business).

The background to these provisions dates back several decades, and related initially to foreign investments in countries with distinctly questionable legal and judicial systems.  Perhaps there might have been a case for recipient countries to agree to such provisions (just as two private parties might agree that a contract will decided under the rules of another country’s law –  English law is a common example).  But even then, only perhaps.  As I noted last year, it wasn’t the way Britain went about things when it was the leading economy and leading capital exporter in the 19th century.  The British approach then was one of caveat emptor.

More to the point, these ISDS provisions have now become prevalent in deals among countries that have good domestic legal and judicial systems, and it is just not apparent what interest of the citizens of TPP countries is being served by having further extended the ambit of such agreements.  From a foreign investor’s perspective, additional options are always more attractive than fewer options, but why would the governments of our countries provide greater rights, and more remedies, to a company simply because it is foreign-owned? A Peruvian-owned grocery chain operating in New Zealand would have different remedies available than a New Zealand owned grocery chain operating in New Zealand.  I can see no good reason –  nor for the reverse favouritism (benefiting New Zealand investors in, say, Peru).  In the process of doing so we undermine the role of our domestic judicial systems, in favour of international bodies where there is little accountability, few or no appeal rights, and no real sense of the domestic environment.

The National Interest Assessment document, perhaps unsurprisingly, dealt with very few of these issues.  In particular, it does not once mention the role of domestic judicial systems, or make the case for different remedies being open to foreign-owned rather than domestic owned firms.  It does, however, note that although the New Zealand government has not yet faced an ISDS suit,  TPP may increase the risk of future such suits.

Unease about the prevalence of ISDS provisions doesn’t seem to be an issue where opinion divides on predictable ideological lines.  In the same report I mentioned earlier, the Australian Productivity Commission expressed its concerns about such provisions, noting among other things that in recent years 40 per cent of all ISDS cases have been taken against governments of advanced countries, presumably countries with fairly well-developed legal and judicial systems.  The Cato Institute, a high profile US think tank    self-described as “libertarian” (rather than promoting specific corporate interests), has been producing material sceptical of ISDS provisions for some time.  As one of their analysts put it quite recently, while noting that changes could be made to deal with some of the more egregious aspects of ISDS arrangements:.

But more fundamentally, we should rethink the need for the system. These treaties were designed to address a problem from decades ago that is fading from memory. What, if any, problems arise with foreign investment today? The most prominent one is probably lavish subsidies from governments that are regularly given to foreign investors, and international limits on such practices could be of value.

The final area I wanted to touch on is the growing role of international treaties etc in constraining domestic law and regulatory freedom.  As many commentators have pointed out, every international agreement New Zealand signs ties our hands to some extent or other.  But that simply means we should ask hard questions about the details of the treaties we are signing up to.  Again, this isn’t an issue that divides neat on traditional left vs right ideological grounds –  both sides can be equally suspicious of domestic political processes, and as enamoured of constraining governments in international agreements that make it harder to do things their own citizens might favour.  On the sceptical side, I have sitting beside me the January 2016 issue of the “right-wing” political and cultural magazine The New Criterion which has several articles worrying about the implications of the growing number of such agreements.

Much of the local debate around TPP appears to be around issues associated with public health, the environment, and the Treaty.   But I found the labour chapter interesting.  In this chapter we appear to be signing up to an international agreement to constrain countries’ flexibility around labour law across the TPP group of countries. Indeed, the government  –  which has itself done some modest reforms to increase the flexibility of labour markets –  celebrates this: in discussing the labour provisions the NIA begins “The Labour Chapter of TPP constitutes the strongest outcome on trade and labour contained in any FTA negotiated by New Zealand”.

But why should domestic labour laws be subject to constraints in international treaties?

The NIA goes on to note –  recall this is our own government speaking – that “it is inappropriate to encourage trade or investment by weakening or reducing labour laws”.  I was somewhat staggered when I first read those lines –  I seemed to recall that the government had made the case for its own domestic labour market reforms on the basis of promoting the competitiveness of the New Zealand economy.  And sure enough, here was the Prime Minister announcing National’s 2011 employment relations policy.

 “A flexible and fair labour market is critical for building a stronger and more competitive economy, and creating more real jobs,”

Does the government not, for example, recognise that a lower exchange rate improves the competitive position of New Zealand firms by, for a time, lowering the effective real wages of New Zealand workers?  Sometimes that is a vital part of successful economic adjustment.   What conceivable economic logic is the government using to support that idea that ability to amend labour laws play no part in shaping a successful competitive economy?

Similarly, why are we signing a treaty that appears to commit New Zealand to having a minimum wage?  What does it have to do with promoting free trade (or even investment)?   There are arguments to be had around the economic impact of minimum wage provisions, but not all countries appear to have such provisions (not even all advanced countries) and surely it should be a matter of choice for each country’s own domestic political processes?

I’m also a little puzzled how this chapter works. In a unitary state such as New Zealand, all labour law is national, but in federal systems such as the United States and Australia, much labour law is done at the state level –  and the TPP labour chapter appears to cover only federal labour market legislation or regulations in those two countries.

Much in this chapter  seems to represent bad and unnecessary policy – a proliferation of bureaucracy at best, and the totally unnecessary sacrifice of domestic policy flexibility at worst.

At the vacuous end of the spectrum are provisions like “each Party shall endeavour to encourage enterprises to voluntarily adopt corporate social responsibility initiatives on labour issues that have been endorsed or supported by that Party”.  In one sense, it commits each country to almost nothing.    But it will no doubt be used by empire-building (or even just risk averse) officials, and perhaps politicians, to spend more public resources developing “voluntary” codes of “corporate social responsibility” –  after all, if they had no such codes, or firms weren’t sufficiently encouraged to comply with them, it might open New Zealand to a challenge from another government, or firms in other countries.

And then we have provisions for Cooperative Labour Dialogue  and the new Labour Council (and its associated “general work programme”).  It isn’t clear why we would want to enter such arrangements even with other advanced countries, let alone with Vietnam or Peru.  A recipe for small and lean government it is not ( and I won’t bore readers by listing the items  (a to u) which the parties agree they might “caucus and leverage their respective membership in regional and multilateral for a to further their common interest in addressing labour issues –  except to note that “work-life balance” appears on the list, and corporate social responsibility pops up again).  Real resources will devoted to paying for all these new bureaucratic and political overlays.  It seemed laughable to suggest, as the NIA does (p22) that the additional cost of all the TPP institutional arrangements, outreach activities etc will be only $1m per annum, across all areas of government.

Now, I’m sure that the pressure for this labour chapter did not come from the New Zealand government but from the centre-left United States government  –  the front page of the US Trade Representative’s TPP page has always been sobering on that score (the unholy alignment of US labour interests and US-based businesses concerned to undermine the competitiveness of firms in emerging markets).  But what is our own government doing championing this additional overlay of domestic and international bureaucracy?  Perhaps it won’t materially alter anything specific the current government wants to do, but these agreements last a lot longer than the next 18 months, and have a way of evolving obligations and constraints that were not always apparent at the start.

So I’m left, so far, unconvinced by the case for the TPP deal.  The trade benefits seems likely to be small –  but without an authoritative independent assessment it is hard to know –  and set against those possible small gains are certain costs and risks, some in areas (such as our judicial system, and dispute settlement systems in society) that really shouldn’t be up for grabs at all.  Add in the additional overlay of an extension of bureaucracy around the 14 countries –  and the desire to spread those regulations to a widening group of countries –  in areas where regulatory competition seems more desirable than otherwise, and it doesn’t look like a deal that should automatically summon support from all thinking people.

It looks and feels like a deal that would better never have been agreed.  And if it falls over eventually because, for example, it can’t get past the US Congress –  or a future President refuses to even submit it to Congress –  New Zealand and other countries might be better off as a result.

Assuming the agreement does go ahead, our government argues that for New Zealand not to participate would risk isolating New Zealand, contributing to our economic decline.    Perhaps (and there might well be net costs to being outside a ratified agreement) although that argument might be more convincing if the last 70 years had not been a story of barely-interrupted economic decline, or if the government had a credible narrative for how to reverse that decline.  Nothing the current government, or its Labour-led predecessor, have done, looks to have been successful in even beginning to reverse  it.  But the growing burden of the regulatory state –  advancing domestically, and by treaties such as this, certainly doesn’t look like a way to reverse our decline.