Advocating for the CPTPP

A couple of days ago MFAT released its National Interest Analysis of the new CPTPP preferential trade, investment (and all manner of other stuff) agreement.  Unsurprisingly, given MFAT’s own heavy involvement in negotiating the agreement for the government of the day, MFAT concludes that New Zealand should sign the agreement.

They may well be correct that, taking all the aspects of the agreement together, and recognising that the other countries would probably have gone ahead even if New Zealand hadn’t signed, entering the now-concluded agreement would be in the best interests of New Zealanders as a whole.    But the National Interest Analysis (NIA) isn’t the resource an interested and informed citizen would turn to for a considered assessment of all the pros and cons.  The NIA is really best seen as an advocacy document, written to make the government’s case.    In particular, the document seems targeted to the government’s (generally) left-of-centre constituencies.  And there are some pretty questionable claims included, for example about the gains from past preferential agreements (notably, the implication that all the growth in trade with China in the last decade is the fruit of the trade agreement, a suggestion which is simply without credible foundation).

That doesn’t mean the document has no value at all.   There is some useful summary descriptive material in it, but it is not the sort of independent professional assessment that the public (indeed Parliament itself) deserves before reaching a final view on the deal.    It seems unlikely that there will such an assessment done.   There will be select committee hearings on the deal but, even if they had the inclination, parliamentary committees don’t have the resources to commission such research and advice, and successive governments have had no interest in doing so.  That’s a shame.  A well-regarded agency like the Productivity Commission, hiring in specific expertise, could have made a valuable contribution to the debate.

The agreement is so large, covering such diverse ground, that there is no easy single, or agreed, metric for reaching a final conclusion.  Some might put the highest weight on the likely, but modest, trade and GDP gains.  But others, equally rationally, might use a quite different set of weights: not denying the probable trade benefits, but putting greater weight in things like ISDS provisions, or the way in which these agreements reach behind the border to influence domestic policy, on matters historically seen as simply matters for national governments.  For others still, just the risks of “being out of the club” might weigh most heavily.   In that sense, no independent agency can reach some definitive bottom line number that the deal is or is not good for New Zealand.  But, done well, such an assessment could still canvass the full range of issues, advantages and disadvantages, static effects and dynamic ones, leaving voters (and MPs) to make their own final assessments.

Much of the attention inevitably focuses on the bits where MFAT has produced some numbers: estimates that, when all new liberalisation measures (tariff reductions and non-tariff measures) have come into force (15 or 20 years away) annual GDP might be anything from 0.3 to 1.0 per cent higher.   Those aren’t tiny numbers (in the scheme of the sorts of model results one gets for micro reforms) but they need to be discounted to some extent precisely because the full effects are quite a long way into the future (and we have the highest interest rates –  and discount rates –  in the advanced world).  Perhaps a little more concerningly, MFAT does not appear to have published the modelling work they commissioned (all we have is a couple of summary tables), and thus it isn’t easy to know what assumptions they’ve made.  For example, in MFAT publications a lot is made of the gross value of the reductions in tariffs New Zealand exporters will pay, but we aren’t told what assumptions are made about the incidence of those tariffs.  When New Zealand removed most of its import restrictions the biggest winners were, almost certainly, New Zealand consumers rather than other countries’ exporters.

I’m not uncomfortable with the idea of a small gain in GDP as a result of the deal.  Almost inevitably it will be quite small, because New Zealand already has other agreements with most of the other CPTPP countries, and of the remaining four only Japan is really a large export destination for New Zealand producers.

I’m rather more uncomfortable with the claim (made repeatedly in the document) that the agreement will increase employment in New Zealand.  Frankly, that seems unlikely and I’m not sure what they base their claim on.  Monetary policy tends to be run in a way designed to keep the economy not too far from “full employment” (the rate of unemployment consistent with stable inflation).  From that base, trade agreements –  or other reforms – might boost GDP, and wage rates, but they are unlikely to boost employment numbers.  People employed in one industry can’t be employed in another, so if the CPTPP agreement really does boost exports (and employment in export industries) it will have to do so by shaking some labour out of other sectors.  Over time, higher exports will be matched by higher imports (a good outcome).  It might seem a small point, but overclaiming in one area that I know something specific about makes me even more nervous about the rest of the document.

What of the assessment of some of the other aspects of the agreement?

The government has gone on record as opposing ISDS clauses on principle, but has nonetheless signed up to an agreement which still has extensive scope for the use of such dispute settlement arrangements.   MFAT attempts to downplay the disadvantages to New Zealand (and highlight some potential benefits to New Zealand foreign investors).   But they never once highlight one of the most fundamental arguments against: the importance of the rule of law and, within that, the principle of equal access to justice.  ISDS provisions allow foreign investors recourse to resolution procedures not open to domestic investors engaged in exactly the same business.   Particularly in a country with a robust, independent, judiciary that should be simply unacceptable.   But it doesn’t seem to be a perspective that had occurred to our MFAT officials in their enthusiasm to sell the deal.

MFAT officials also seem not to recognise that, under some models (ways of thinking about how to organise society) there might be downsides to the fairly extensive way in which this agreement reaches behind borders into matters that the principle of subsidiarity suggests should really be solely for national governments.     Perhaps most of the left-wing constituencies rather like the idea of having labour and environmental chapters in the agreement, tying the hands of others governments and our own.  On the pro-business side, agreed procedures around regulatory issues might appeal to some.  But a principle like that, once adopted, can be a double-edged sword: other governments will commit to other regulatory limits that the enthusiasts for this particular set of controls won’t like.

MFAT, of course, seems to buy into all this without question.   In describing the labour chapter, for example, they talk blithely of it being ‘inappropriate to encourage trade or investment by weakening or reducing labour laws”, and assert that the agreement “helps ensure that CPTPP Parties’ competitive advantage in trade is not undermined” by agreement to “level the playing field for New Zealand companies and employees by setting minimum labour obligations for all parties”.    So microeconomic reforms that liberalise the labour market –  perhaps reducing the ratio of the minimum wage to the median wage – can never in future be adopted, lest some other government (perhaps under pressure from its own unions or firms) invoke dispute settlement provisions?   And what do they think real exchange rate adjustments are, but competing on the basis of changed real relative unit labour costs?  Some defenders of these sorts of provisions will talk of how these sorts of provisions aren’t very binding or effectively very enforceable. Even if so –  and only time will tell –  that just makes them bad law.  And there is a reasonable argument (in economics, and in principles of responsive democratic government) that they just shouldn’t be in a trade agreement at all.  But that perspective (and the risks) doesn’t even seem to be recognised –  even to be discounted – by MFAT.

And then there are near-vacuous provisions, which MFAT suggests have no disadvantages.    What business is it of governments to be, for example, encouraging enterprises to adopt “corporate social responsibility” initiatives?  And even if there is a case, surely there are downsides (more bureaucrats if nothing else) to the proliferation of feel-good initiatives.  Or around the creation of fora in which countries (bureaucracies) might work together on topics like work-life balance or “innovative workplace practices”.

There are so many of these sorts of provisions with no serious evaluation, guided (presumably) by an officials’ view that more meetings, more international coordination can only be “a good thing” or at least harmless.  There is, for example, an entire Development chapter, which establishes a whole new Committee on Development, explicitly designed as a talkfest on such topics as “women and economic growth” and “broad-based economic growth”.  Even if these are flavour-of-the-day topics right now, this agreement is presumably planned to live for decades  For decades, officials will cross the world, adding carbon miles as they do, all at the expense (perhaps small) of domestic taxpayers.  And yet MFAT explicitly state that there are no disadvantages.

There are all sort of more substantive provisions that aren’t seriously evaluated.  For example, countries are free to impose some temporary exchange controls in the event of a serious economic crisis, but under this agreement they won’t be able to restrict flows associated with foreign direct investment. In effect, this amounts to preferencing foreign investors over domestic investors in a crisis: domestic owners can be forbidden from shifting proceeds abroad, but foreign owners can’t.  Perhaps there is a good case for it –  although when I was an official I argued against it – but there is simply no serious attempt at evaluation, either of this line item or of the overall approach to crisis exceptions.

I’m still ambivalent about the overall agreement.  Perhaps for foreign policy reasons we had to be part of the deal once it was done.  Probably there will be some modest overall real GDP gains.  But undermining equal access before the law – not carving out special jurisdictions for cross-border investors – isn’t a principle that is priced here, and it seems to me it is something we just shouldn’t be sacrificing.    Others will reach different overall conclusions, but the process of doing so –  in an informed way –  would have been much assisted by a more independent, and far-reaching, assessment of the many provisions of the agreement.

(For those interested in ISDS issues, there was an interesting new article in the latest issue of the American Affairs magazine by a Yale law professor.)


6 thoughts on “Advocating for the CPTPP

  1. I enjoyed reading your post. I agree with much of what you say, but am thinking about other aspects and disagree on others.

    I was dismayed to hear National’s Todd McClay welcoming the prospect of USA seeking to re- enter as under Trump their already heavy handed view of FTAs being to benefit USA to others disadvantage would be exacerbated. USA should not be allowed back in unless it accepts the agreement as it is, including maintenance of the suspended elements.

    Liked by 1 person

  2. Since we do not manufacture much to export other than to subsidise the food production of other countries, it is doubtful we even need to be involved in these trade agreements. With 10 million cows and 30 million sheep generating only $15 billion in export GDP which we have to end up paying the cost of the Paris Agreement in carbon dioxide emmissions and the rest of agriculture contributing 50% of these pollutants but wearing none of the costs.

    Liked by 1 person

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