Brian Easton and trade agreements

When the original TPP agreement was signed, various New Zealand economists weighed in.   There wasn’t a great deal of enthusiasm for the deal.  Here was Eric Crampton’s summary of a few contributions.

I think it’s fair to say that Brian Easton sits to the left of the NZ economist punditsphere, and that Mike Reddell sits to the right of the same.

In the past couple days, they’ve both put out their views on the TPPA. Reddell winds up arguing generally against it, though without saying it shouldn’t be signed, and Easton in favour, though not that enthusiastically. Both make nuanced arguments. Easton talks about the flow-on consequences of rejecting the deal at this point. Reddell talks about how the layers of bureaucracy to which we may well be signing up will do nothing to improve New Zealand’s declining productivity, though he falls short of saying NZ should reject the thing from where we’re at. He notes by email that he’d agree with Easton: from where we are, it should be signed. But he’s not all that enthusiastic.

I’ll remain a fence-sitter as it would take just too much work to come to a strong view on it. My confidence interval on whether the thing’s worth signing spans low/mid positive and low negative figures, and it wouldn’t be easy to tighten that up.

On the left, economists like Tim Hazeldine and Geoff Bertram had been sceptical, and from the right Jim Rose argued that the “correct” economists’ reaction to such agreements was generally “lukewarm opposition” –  the opening stance of as eminent a trade economist as Paul Krugman – but that there probably wasn’t much harm, and perhaps some modest gains, in signing up to TPP.

And so when I wrote a brief post last week, after the news that the modestly-revised deal had been agreed minus the US, reprising some of my arguments from a couple of years ago, I didn’t think much of it.   There looked to be some worthwhile aspects to the deal, some quite troubling ones, and just some puzzling ones as well.  And since such an eminent beacon of economic orthodoxy as the Australian Productivity Commission has long been sceptical of such regional preferential deals, mine was as much as anything an argument for some proper robust independent assessment of the costs and benefits of the agreement.    When international deals are done behind closed doors, it seems like a reasonable part of open domestic government that a proper independent assessment of the resulting product be done.  The actual National Interests Assessment of TPP, done by the same body that negotiated the deal, hardly counted.

And so I was a bit surprised when I saw that Brian Easton had responded to my post (which had been reproduced on Newsroom).  Apparently Brian thought he had come to a quite different conclusion.  But the differences seem quite small, except on the China FTA (which my post hadn’t even touched on).

For example, we agree when he notes that

Should not a pro-free trader support a free trade deal? The correct answer is ‘not always’.

We also seem to agree that domestic regulation, eg of labour markets, should be a matter for domestic governments, not for international trade/investment agreements.

they are increasingly going behind the borders – in effect moving towards the unification of market regulation between countries. There may sometimes be gains in doing this but 35 years of CER with its incremental steps in regulatory unification shows how difficult it is to do properly. Personally, I favour subsidiarity (that decisions should be left to the lowest level) over global unification.

I am sceptical of –  opposed to in fact –  ISDS provisions, and Brian seems more relaxed

(For an alternative view of the investor-state dispute settlement provisions, see here. It is not the ISDS which undermines our sovereignty but that we encourage overseas investment.)

But he seems to misunderstand my concern.  I largely avoid references to “sovereignty”, because as Brian notes whenever any of us deal with anyone else –  overseas trade, employment or whatever, it often constrains our freedom of action to some extent, trading off against the gains from doing the transactions.   What bothers me is the fundamental principle of equality before the law –  some people shouldn’t have access to remedies not open to other people –  as well as a reluctance to make things that seem inherently political subject to the jurisdiction of courts, domestic or foreign.  As I’ve noted in earlier posts, ISDS provisions are not necessary to foreign investment –  they’ve only been around for 60 years or so, and only became common in the last couple of decades.  And there was nothing comparable in the first great age of globalisation prior to World War One.

Perhaps there is a difference around unilateral moves to free trade. I had noted that if the government was serious about its free trade bona fides, it could at a stroke remove the remaining (mostly quite low) tariffs New Zealand has in place.  Standard international trade theory tells us that New Zealanders as a whole would benefit from doing so –  since our tariffs are on things where we are a price-taker in international markets.  Mostly, tariffs are costly to the citizens of the country imposing them.  Brian appears to disagree

For example, were we to announce we would drop all our tariffs to zero to the US in exchange for nothing we would be unlikely to benefit, although the US would.

but I’m not sure why.  He doesn’t say.   But mine had been a (longrunning) rhetorical flourish –  repeating a policy recommendation that the 2025 Taskforce had made almost a decade ago –  and didn’t really have any direct bearing on an assessment of the costs and benefits of the TPP-1 deal.

Is improved access to foreign markets for our agricultural exporters likely to be beneficial?  Indeed.  And on this Brian and I seem to be at one.   Brian notes that

More subtly, the pastoral terms of trade have been rising since the Tokyo Round of multinational trade liberalisation in the 1970s. It would be foolish to say that the rise was entirely the result of the trade rounds, but it would be as unwise to say that trade liberalisation has had no effect. TPP11 involves a small improvement in pastoral exports access; there will be another (small) boost to export prices and a small boost to effective GDP (real spending power) if we respond sensibly.

There probably isn’t much dispute that the improved access for pastoral exports will be a boost to New Zealand, but that is only one part of the deal, and to be able to point to gains in some areas isn’t to demonstrate net gains for the citizenry from the deal as a whole.      And, without claiming any great expertise in the area, I would be a little wary of ascribing too much of the gains in the pastoral terms of trade in recent decades to trade liberalisation.  But as I’ve pointed out repeatedly, this isn’t primarily an argument about free trade –  which I think is almost always mutually beneficial –  but about preferential regional trade, investment and regulatory agreements, where there is no strong theoretical prior suggesting mutual gains.

I suspect that what motivated Brian Easton to write his column wasn’t really differences over the TPP-1 deal (it being neither “comprehensive” nor self-evidently “progressive” I’ll hold off using the new official label) at all.  After all, go back and read his take on the earlier deal and if, on balance, he was supportive, it wasn’t very enthusiastic in tone, except perhaps in the sense (which I accept) that if everyone else is in the club we probably should be too.   Instead, there appears to be a large difference between us on the China FTA.  After noting that I had expressed some scepticism about the evidence base for claims that our various preferential agreements had done much for New Zealanders as a whole, Easton responded.

it is not controversial to say that without the Chinese FTA the New Zealand economy and all those in it, would have suffered greatly from the Global Financial Crisis in a way that others did. (Even so we blew some of the potential benefits by allowing a speculative farmland boom; our trade negotiators were hardly to blame for this.) 

Frankly, it was this paragraph that prompted me to respond to his column.      If Easton’s claim here isn’t controversial, it certainly should be.  I’ve never before seen a serious economist make the claim, only politicians (one of whom I’ll come back to in a moment).

For a start, the timing doesn’t work (at all).  The China FTA was signed in April 2008, and came into effect in October 2008.  It provided for a 12 year period of phasing down (or out) restrictions previously in place.   The dairy land boom (and associated credit boom) had been running for years by then, and global dairy prices had risen sharply from late 2006 (some combination of rising oil prices, rising grain prices, and reduced EU stockpiles), prompting the last wave of OCR increases in the first half of 2007.     The New Zealand recession dated from the March quarter of 2008, and in that recession global dairy prices fell savagely: there were real concerns in the first half of 2009 around a possible threat to financial stability from dairy loan losses (and indeed about potential threats to Fonterra’s own finances).

Now quite possibly China’s general demand stimulus helped prompt a recovery in global economic activity in the years following the recession.  Quite possibly, the FTA also boosted total New Zealand dairy returns over the following few years –  but Chinese babies wanted formula, consumers wanted milk powder products, and the melamine scandal would have happened anyway, whether or not there was a China-New Zealand FTA.    The terms of trade have been helpful, but how much that specific deal boosted the terms of trade –  and for how long –  needs a lot more detailed study than either Easton or I have done.

But Easton’s story also doesn’t make a lot of sense because, actually, our experience in the  great recession of 2008/09 was quite bad.    I’ve covered this argument before, in a post after a speech outgoing Foreign Minister Murray McCully gave last year

Had it not been for the dramatic expansion of trade and economic relations with China in the early years of the Key Government, New Zealand would have suffered a long and sustained recession, and all of the associated social challenges that we have seen in some European nations.

But there is almost no evidence to support such a view?  Actually, over the first two or three years of the recession and aftermath, the path of New Zealand’s real GDP per capita wasn’t much different than that of the US –  the epicentre of the financial crisis, and a country that conventionally exhausted the limits of conventional monetary policy.  Our initial recession was a bit shallower, but our initial recovery was even weaker.   And as I illustrated in the earlier post, over the decade our trade share of GDP has shrunk, while that of the US stayed relatively steady.

What really marked out the crisis countries of Europe from New Zealand (or Australia –  no China FTA then, Canada –  no China FTA eve now, or the United States, or Norway or Sweden) from the more crisis-hit countries of Europe, wasn’t an FTA with China, but a floating exchange rate and discretionary monetary policy.  And even then, don’t forget our increasingly poor productivity performance –  almost no productivity growth in the last five years, even as (say) the fast-emerging countries of eastern and central Europe have managed substantial productivity gains.

As I noted in the earlier post responding to Murray McCully’s claims

Perhaps this fawning “China our saviour” line went over well when the Premier of China was visiting recently, but it really doesn’t amount to much at all.  The country composition of our exports has changed –  and for a couple of years perhaps high prices out of China for milk powder lifted farmer incomes –  but as a share of the overall income, exports have been shrinking.  We produce stuff (mostly bulk commodities), and someone buys it.  In recent years, China has been a more important buyer –  although Australia remains our largest export market –  and the free trade agreement with China is likely to have been helpful, but it has hardly transformed our economic fortunes.

But, as with the new agreement, hard-headed independent assessments of deals that are always as much about politics, and political signalling, as about economics, would be welcome.

UPDATE: A reader much closer to these things than I am emails to suggest that the biggest gains from the China FTA aren’t to do with reduced tariffs but with improved trade facilitation.  Paper work happens more smoothly than it otherwise would, in ways that make a real difference.  Sounds plausible.

9 thoughts on “Brian Easton and trade agreements

  1. I have always been curious as to how it can be more economic for shoppers to purchase the packaged product at retail prices here in NZ, than to package it here and sell it as branded goods offshore. After all, Denmark manages to sell packaged and branded Lurpak butter all over the world without feeling the need to ship it in bulk and repackage it at destination. Is it the decision of the manufacturers, or is it Chinese industrial policy that they only want to import bulk commodities from NZ. There have also been a few questionable ‘scandals’ over product quality that seem almost calculated to protect domestic Chinese milk powder manufacturers.

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  2. I’m curious about who really pushes behind the scenes for the inclusion of things like ISDS. At one time I would have said the US, but since they are not included in the latest iteration of the TPP, I’m wondering who is the guilty party ? Why didn’t NZ argue harder for the removal of them from the agreement ?

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    • Probably two strands: first the TPP-1 is still mostly the deal signed when the US was part of it, and given the path dependencies that previous influence will have still mattered. Second, some developing countries are quite keen on ISDS because they know they have a feeble domestic justice system and rather than fix it – hard and time-consuming, ISDS provisions represent a way round, to help attract foreign investment.

      As for our own govts, I guess the Nats didn’t really care one way or the other about ISDS provisions – they are just part of the trade agreement furniture – and by the time the new govt came in the process was so far advanced that if they had tried to take a very hard line on ISDS either the agreement wouldn’t have happened ( bad political signalling to the business community, already wary of them) or NZ might have risked being left out of the final deal (probably even worse, both substantively and in terms of political signalling).

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  3. Please explain

    How do economists get labelled with #hashtag-left or #hashtag-right

    One would hope professionals acting in a professional capacity would act neutrally, impartially

    If I were dealing with a client who was contemplating a proposed venture or action I would evaluate the proposition and submit a range of outcomes with the fors and againsts, the risks and advantages, for the client to make their own decisions. Most business decisions involve taking an informed punt. I would be reluctant to recommend any one particular action

    Liked by 1 person

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