Some scepticism about EU trade

Count me more than a little sceptical about the agreement the government and the EU are planning to negotiate over the next few years (should be EU itself survive long enough –  the latest threat being Italy).   It isn’t even clear how to describe the proposed deal.  Champions seem to like to talk of “free-trade agreements”, but of course this will be anything but on the trade side (no free trade in agriculture is in prospect), with lots of more regulatory stuff in the agreement as well, often in areas that are likely to impose additional burdens on economic activity or constrain the government’s future freedom of regulatory action.  Throw in some additional bureaucratic overhead in various areas, and perhaps the proposed agreement should just be called “Agreement between New Zealand and the EU on sundry matters”.  New Zealand officials and ministers have long been aggrieved that the EU wouldn’t negotiate such an agreement with New Zealand, so for them it is, no doubt, a win.  Whether it is much, if any, of a win for New Zealanders is another matter.

Peak hype seemed to be reached in Stacey Kirk’s column in the Dominion-Post this morning in which we are told

But a free trade deal with Europe has the potential to be transformative for the entire country, with the potential to grow this little rock-star economy even further.

That would be the “rock-star economy” that has had almost no productivity growth for the last five years, and where exports and imports as a share of GDP have been shrinking?

And when Kirk says “transformative”, it must just be intended to sound good.  A couple of paragraphs later, we read

But early estimates suggest an EU free trade agreement could add another $1b-$2b to New Zealand’s annual GDP over time, with a 10 to 22 per cent increase in trade volumes.

Since annual GDP is already around $280 billion, even on those numbers it is a gain of perhaps 0.5 per cent.  I know productivity gains have been in short supply in New Zealand recently, but on no measure is a 0.5 per cent gain (probably arising over 10-20 years) anything resembling “transformative”.

Government releases have noted that total two-way trade with the EU is around $20 billion at present ($22 billion in 2017). Of that, around $4.5 billion is with the UK, which is leaving the EU next year (and where the New Zealand and British governments plan to sign their own agreement).

But it is worth noting that we import a lot more from the EU than we export (exports are about two-thirds of imports).  That isn’t a problem at all, but it is a reminder that from a New Zealand perspective, this agreement isn’t about $22 billion of trade, but about $5.6 billion of exports to EU countries other than the UK.  Stacey Kirk tells us that “the cost of importing European goods would be significantly reduced”.  That doesn’t seem very likely as most of our tariffs are low already.  More importantly, if we wanted to achieve those particular gains (however large they are) we could do it tomorrow: just lift the tariffs we impose, and which tax our own people.

And what is it that New Zealand firms export to the EU?

Major goods exports $m 2017
Meat and edible offal           1,543
Fruit              649
Wine              562
Fish, crustaceans, and molluscs              233
Optical, medical, and measuring equipment              205
Major services exports
Travel services           2,369
      Business travel               91
      Education travel              209
      Other personal travel           2,069
Transportation services              437
Other business services              224

By far the largest items are “other personal travel” (holidays) and meat.    There are no tariffs (or quotas) on EU people holidaying here –  so no gains from the mooted agreement there –  and meat seems likely, on past EU form, to be a considerable sticking point, where any gains are small and quite a long time coming.   “Educational travel” also seems unlikely to offer any gains.

If we focus just on trade with the euro-area (the summary numbers SNZ provides –  and the biggest difference between the EU and the eurozone is the UK) personal travel and meat are still by far the biggest exports.

But, as already noted, it is just goods and services.  On Kirk’s telling

The final deal with include requirements around sustainability and climate change, labour standards and animal welfare.  Parker has already suggested that New Zealand might face barriers over whether its goods and deemed to be environmentally friendly or sustainable enough.

Intellectual property isn’t an area in which the EU is known for its liberal approach. Thus, in the same newspaper this morning, trade consultant/lobbyist and former MFAT staffer Charles Finny notes that

Patents for medicines, geographic indications (such as Parmesan cheese), data localisation rules and investment will all be difficult to resolve.  This will also be one of the first negotiations where New Zealand will be arguing for provisions on gender and indigenous issues.

What?  Finny points out that we have an indigenous chapter in the New Zealand agreement with Taiwan.   In it the two sides commit (p199) as follows

2. The Parties shall, through their coordinating authorities:

(a) hold at least one meeting each year for the planning of measures designed to enhance economic, cultural and people-to-people contacts between the indigenous peoples in the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu and New Zealand’s Māori;

(b) promote and facilitate the exchange of experiences relating to indigenous peoples’ issues, including the following areas: economic and business development, tourism, natural resource development, artistic performances, agricultural production, culture, language promotion, education, human rights, land ownership issues, employment, social policy, biodiversity, sports and traditional medicine;

(c) promote and facilitate the development of direct contacts with or between academic institutions, non-governmental organisations, local government bodies and tribal authorities, to support these endeavours;

(d) promote indigenous personnel exchanges in academic, cultural and business exchanges through conferences on a rotation basis, including educators, cultural workers, language instructors, writers and artists, linguists, and ethnologists;

(e) promote stronger relationships between Māori exporters and importers in the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu;

It might be mostly bumpf, but it all costs money, and involves the state going where it really has no business.  Then again, I don’t suppose the EU will be agreeing to recognise that rights and interests of the Catalans.

Perhaps too we’ll find everyone in New Zealand required to adopt something very like the incredibly onerous new data protection and privacy regime just coming into effect in the EU.  And for what?

Assessing any economic benefits depends a lot on the specific details of any agreement that might be reached (and ratified –  as the EU/Canada agreement illustrates, ratification is no sure thing in Europe).  But I noticed some results from a paper ,with an interesting discussion of the potential issues relevant to New Zealand and including some modelling, done a couple of years ago by some Lincoln University researchers.  I can’t speak to the quality of the modelling, so am just passing on what I read.

A scenario of full trade liberalisation between the EU and New Zealand was modelled. Whilst an unlikely outcome of the free trade negotiations between the EU and New Zealand, it is an important indicator of the most extreme potential economic outcomes of more likely moderate agreements. This scenario can be thought of as the upper-bounds of any trade agreement outcomes.

(remarkably, this scenario includes New Zealand removing remaining tariffs on milk powder imports)

And here is their summary of the modelling results (again, for a full liberalisation scenario)

Importantly these results show that for the agricultural commodities considered in the modelling exercise, total producer returns in both the EU and New Zealand are expected to increase, be it marginally. The most significant changes would be for apple production and returns in New Zealand which rise significantly, whilst sheep and wool returns are expected to drop slightly. Most other changes are marginal, although wine producers in New Zealand are expected to experience an increase in returns of almost 10 per cent even given a drop in production.

In another article in the last couple of days we read

Dairy Companies Association executive director Kimberly Crewther said New Zealand dairy exports to the EU were “highly constrained” and the elimination of all existing tariff barriers should be a priority.

“In 2017, just 9000 of the more than two million tonnes of butter consumed in the EU was imported. Maintaining this level of protection does not make sense when the EU is a competitive dairy exporter in its own right.”

A laudable goal –  indeed, getting to the crux of the issue – but I doubt anyone thinks it is going to happen.  This simply won’t be any sort of agreement providing for free-trade.

I would commend the government on its decision to exclude ISDS provisions from future agreements, and the Minister’s comment here

“At the start of negotiations, we’ll be releasing a package of information outlining our negotiating priorities for this agreement and how we will be engaging with New Zealanders as negotiations progress,” David Parker said.

suggests the beginnings of a more transparent approach.  But it is far from clear that there are net benefits to New Zealanders from the sort of deal the government is actually likely to conclude.  No doubt, some classes of firms will be a bit better off –  and those gains will be concentrated, so those interests will be vocal –  but there are many areas in which New Zealanders as a whole could find themselves potentially worse off, and with the potential for future governments to take a different stance constrained by an ever-more-complex web of international agreements.

I’m all for free trade.  Among an group of (genuine) market economies and democratic countries, I’d also have a pretty much open-slather approach to foreign investment.   New Zealanders would benefit from that. But we’d also benefit from retaining a freedom to regulate, or not, domestic activities according to our own analysis, and our own preferences.  And leaving citizens and governments in other countries free to govern themselves.   But that isn’t what is on offer in this agreement.  There is a risk that it is more about political symbolism –  the interests of politicians –  that of substance that benefits citizens as a whole.