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.)

And so it appears that agreement has now been reached on a TPP-like agreement, minus the United States.   We haven’t yet seen the details (although this MFAT note is useful), but all the comments late last year suggested that the new agreement would stick as closely to the previously-agreed, but not ratified, TPP as possible (but presumably without the Joint Macroeconomic Declaration).

I wrote a few posts a couple of years ago, expressing doubts about the then-TPP agreement.  I wrote –  and write –  from the pro-trade, pro-market side of the argument.   Which, of course, is not the same as a “pro-business” perspective.

Sadly, TPP (and its replacement), like the welter of preferential trade agreements various governments have been signing over recent decades, isn’t necessarily a step towards free-trade at all.  That is a point the Australian Productivity Commission has long been making about such trade agreements –  probably since around the time of the Australia-US agreement which many independent experts concluded made Australia worse off economically (having been signed for political signalling purposes more than anything else).    These agreements keep MFAT officials busy, and ministers of trade looking as if they are “doing something”, but there isn’t much evidence (net) that they are making New Zealanders as a whole better off.

There were always arguments about how we couldn’t really afford (in some political sense) to stay out if everyone else in the region did a deal of this sort.  And there might be some force to that –  we aren’t the United States, say –  but it would be good to see the arguments made in the context of a robust independent assessment of the costs and benefits of the deal to New Zealanders.  There was nothing like that done here for the ill-fated TPP deal.  The new government has claimed to be interested in more-open government.  This would be a good opportunity to demonstrate that it was serious.

There were all sorts of things that disconcert me about the earlier agreement:

• investor-state dispute settlement provisions should be an affront to every citizen of a functioning democracy with a decent legal system.   We allow foreign investors access to binding dispute resolution procedures against the New Zealand government that are not open to our own companies operating here (people complain, sometimes reasonably about discrimination against foreign investors, but the ISDS procedures invert the arrangements, preferencing non-citizens non-residents over our own people).  And it is no consolation to argue, as government do, “oh, but our own businesses get the same advantage in other countries”.  But if we care at all about nurturing democratic values and the rule of law in other countries, it shouldn’t be a ‘gain’ we are happy with our politicians negotiating.   If you want to do business in (communist) Vietnam, that is your affair, not that of the New Zealand government.
• then there are the labour provisions (which I wrote about here), under which governments declare that domestic labour market regulation is a matter for international negotiation (and associated dispute settlement procedures).  A minimum wage might or might not be a good idea, but there is no sound reason why a requirement to have one should be made part of a binding international treaty.   At the more wishy-washy end of the scale there was this sort of stuff

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.

•  there are unsatisfactory provisions around financial crises.   For example, the TPP agreement required any country considering using direct controls (on foreign exchange flows –  of the sort used by several countries in the last crisis) to preference all flows associated with foreign investment over any other financial flows (including those relating to an identical asset owned by a resident.
• or the weird provision which appears to bind governments to have to compensate foreign investors just as much as citizens in any cases of losses resulting from wars or civil strife.  As I noted in an earlier post, it would have appeared to require the British government, after the Blitz in 1940, to have compensated Swiss or Swedish owners of property on the same terms as it helped its own citizens.   Sometimes that might be appropriate or prudent, but probably not always, and why should it be subject of a binding international treaty, unable to envisage all contingencies.

It isn’t clear how New Zealanders –  or, indeed, citizens of most of the other parties to the new deal –  are going to benefit from the new agreement, which seems to extend the regulatory net even further, and further reduce the ability of citizens/voters to direct and control the activities of their own governments.

Among US commentators who were in favour of TPP it was common to talk of TPP as some sort of instrument in the rivalry with China; that TPP would somehow ensure that “we” would “write the rules of trade for the 21st century etc”.  I’m not sure these “rules of trade” look particularly attractive anyway, and of course if TPP were in any way a threat to China one could be sure that our craven governments (past and present) would not be in such a hurry to sign.

And, of course, if the government was really seriously about free-trade –  itself, a lofty and generally beneficial vision –  it could now unilaterally remove the remaining tariffs New Zealand keeps on imports from other countries; imposts that may benefit a few New Zealand firms, but almost certainly at the detriment of the New Zealand population as a whole.

In a post a couple of weeks ago,  I highlighted the comments several New Zealand economists had made about the TPP agreement.  Reasonably enough –  since to evaluate the full detail involves a great deal of in-depth work –  none seemed overly confident in their views, but none seemed to see the agreement as any sort of landmark beneficial economic advance for New Zealand.

Since then, a couple of other economists have put views on record. Jim Rose, a consultant who has worked for various New Zealand and Australian government agencies (including the Australian Productivity Commission), starts by observing that the “correct” economists’ reaction to regional trade agreements, in principle, would be one of “lukewarm opposition”, reminding us that this is also the stance of Paul Krugman who – whatever his politics – built a stellar academic career thinking about trade issues.

Regional trade agreements risk making all parties to the deal worse off, not better off –  by increasing trade between country pairs that are party to the agreement, rather than those best able to produce goods and services most efficiently.  The Australian Productivity Commission has been quite forthright in highlighting this risk as regard Australia’s various regional trade agreements (including CER, but most notably including the US-Australia FTA).    A new, quite recent study, by Shiro Armstrong, a senior academic at the Australian National University, reviewed the US-Australia FTA.    He concluded

Australia’s historic trade liberalization efforts produced clear welfare gains, and the winners and losers from these reforms were determined by market forces and competition. Trade agreements that introduce distortions and discriminatory treatment mean that winners and losers are largely determined by preferences and privileges assigned through negotiated treaties.

The US agreement carries important lessons for Australia in its future trade and foreign policy strategy.  The conclusions of the Productivity Commission’s review apply to AUSFTA. Deals that are struck in haste for primarily political reasons carry risk of substantial economic damage. The question then is whether the economic costs of such policies are worth whatever the political gain, and indeed, how the balance of properly calculated political gains and costs might look.

Rose’s stance is informed by this sort of literature and experience, which barely seems to have factored in the New Zealand debate around regional trade agreements (and does not appear in the government’s National Interest Assessment).

Rose also highlights a number of other potential problems in the TPP

Trade agreements should not include labour or / and environmental standards as they, for example, limit our right to deregulate our labour market. Be careful what you wish for when you oppose international agreements on sovereignty grounds.

The intellectual property chapters of the TPP are truly suspicious. With each new day, the case for patents and copyrights is weakening in the economic literature. Some have made powerful arguments to abolish patents and copyrights altogether.

There are modest extensions of the term limits of drug patents and much more mischief on copyright terms. These should be watched carefully in future trade talks and one day will be a deal breaker.

Good arguments can be made against investor state dispute settlement provisions even after the carve-outs. These provisions have no place in trade agreements between democracies.

Perhaps Harrison is missing something, but on the face of it this report seems to reinforce the case for an independent assessment of the economic costs and benefits of the deal, as finally agreed, perhaps by someone like the Productivity Commission.  It is hard to do such an exercise well –  a point Rose makes –  and reasonable people will still likely differ, but for such an extensive agreement it should be an almost automatic step in the process if we are serious about considered evaluation of policy.

The issue now isn’t really whether the deal should be ratified by the New Zealand government, but whether –  having been agreed – it represents a good deal for New Zealanders.  Regional trade deals often haven’t been.  Perhaps this one is different.  But without the detailed analysis and scrutiny it will be difficult to know.

Eric Crampton had a post this morning drawing attention to recent posts on TPP by Brian Easton (“to the left of the NZ economist punditsphere”) and me (“to the right of the same”).

In our posts we primarily asked slightly different questions.  Brian posed the question “Can we afford not to adopt the TPPA?” .  He doesn’t express a strong view one way or the other on the economic merits of the deal itself (but, as Eric notes, he doesn’t come across as overly enthusiastic).  Instead, his focus is on the fact that the deal has already been agreed, and that if New Zealand were not to ratify it now, it could be deeply damaging to a range of international relationships.

The logic in this column is that we now do not have much choice about the TPPA. The government is trapped into agreeing to it because rejecting it has implications for other trade deals and our wider international relations.

That is probably right.  I didn’t give that dimension much attention in my post, as I take for granted that having signed the deal the current government will ratify it.  It doesn’t need a vote in Parliament to do so, but would have the numbers even if it did.

My focus was different –  more about the question of whether we, as New Zealanders, should welcome, or regret, that the deal was done at all.  Given that the deal has been done, the implications are quite different if it eventually falls over because the US political process rejects it (neither a President Sanders nor a President Trump might even submit to Congress), than if a single minor country (eg New Zealand) were to walk away unilaterally.

I suspect we’d be better off if the deal had not been done.     But I’d feel more confident of any view  –  positive or negative –  if we had had a proper independent evaluation of all the aspects of the agreement from a capable independent agency (such as the Productivity Commission).

I was also interested in Eric’s own take on the deal

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. If Congress decided not to pass it and the other partners could then clear out the worse parts on copyright, it wouldn’t bother me that much – though the deal on copyright is far better than I’d thought it could have been.

Eric is also on “the right of the economist punditsphere” (probably more so than I am).  In a sense, his point about “it would take just too much work to come to a strong view” echoes the argument for a proper independent expert evaluation.

And, of course, from the left was the sceptical paper on The Economics of TPPA which I linked to other day, which had substantial input from economics academics Geoff Bertram and Tim Hazeldine.

Perhaps I’ve missed someone, but I haven’t seen a ringing endorsement of the overall economic benefits to New Zealand of TPPA from any New Zealand economic commentators.      Perhaps the overall deal is slightly beneficial, or slightly detrimental, to New Zealand’s overall interests.  And different people might reasonably reach different views, by placing different emphases on the various strands of a complex deal.

In the Herald this morning, the Trade Minister argues that “today is exceptionally important day for New Zealand”.  Frankly, that seems unlikely either way.  He claims to believe that his own National Interest Assessment understates the likely economic gains to New Zealand.  It seems unlikely, but it would be interesting to see his argumentation and evidence.

Either way, I had a circular National Party e-mail from McClay yesterday, with a link to a site allegedly “setting the record straight on TPP”. He lost me here

FALSE: Supporting the TPP is a left-right issue

Actually, it’s an economic literacy issue.

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 19^th 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.

Article 9.6bis: Treatment in Case of Armed Conflict or Civil Strife
1. Notwithstanding Article 9.11.6(b) (Non-Conforming Measures), each Party shall accord to investors of another Party and to covered investments non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.

I was a bit surprised to find this one.  Presumably this refers to cases where the state is not bound to provide compensation, but does so discretionarily?  Why would countries sign up to a policy in which they have to treat the losses of citizens/residents the same as the losses of foreigners?  And why only for cases of “armed conflict or civil strife” –  but not, say, earthquakes, bank failures, or other vicissitudes of life?    London was badly bombed in the blitz in 1940.  Is this seriously suggesting that the British government, if it offered any compensation to any of the victims, had to treat, say, the owners of Swiss banks or factories the same as the owners of British banks or factories.  Why would they want to pre-commit to that, in respect of ex gratia measures?

There might be plenty of occasions when a country might want to treat these two groups of people equally, but why should it sign up to committing in advance to such equality of treatment?

Public policy should be made primarily in the interests of the citizens (and perhaps residents) of the country concerned.  In all manner of areas, we treat residents different from non-residents (eg access to public schools and the public health system, let alone voting).  In some cases, we even treat citizens differently from non-citizens: both might go prison for a crime, but the non-citizen can be deported too.  It isn’t always obvious where the lines should be drawn, but draw them we do.  And sometimes we revise them in light of specific circumstances.  But why pre-commit to treat any compensation for this particular class of losses equally between New Zealanders and others?

PS.  On the off chance that “non-discriminatory treatment” only refers to how different countries’ overseas investors are treated, it still seems an odd and inappropriate thing to pre-commit too.  In any “armed conflict”, some other countries will have been allies, other perhaps very friendly, and others neutral or perhaps mildly hostile.  Why would we pre-commit to treating investors from each of those countries equally, in offering discretionary compensation for any losses resulting from armed conflict (or civil strife)?

I still have no idea whether the TPP agreement our government has reached is, on balance, a net benefit to New Zealanders.  Without a proper independent assessment and analysis, undertaken by an agency that is both competent and independent (in the New Zealand case, think of the Productivity Commission), it is going to be difficult to know.   Imposing more regulation, across a range of quite diverse countries, doesn’t have the same presumption of economic benefit that lower tariffs do.  And the addition of yet more international meetings of officials and politicians seems like pure loss.

I’ve printed off, but not yet read, the modelling exercise done for MFAT –  the government’s negotiators –  that suggests annual benefits of as much as 1 per cent of GDP, at least for the subset of provisions they looked at.  And on Saturday, a form email from Tim Groser dropped into my inbox, urging me to sign a National Party petition to show my support for New Zealand’s exporters back TPP as “vital” to our economic future.  Frankly, it seems a little desperate when the Minister of Trade is having to generate his own petitions.

Some of the things I’m most uneasy about are matters of principle.  I think it is simply wrong that foreign investors should have access to different courts than New Zealand firms and individuals do in respect of issues relating to their activities in New Zealand.  Equal and common access to justice should be a foundational principle of our longstanding democracy –  no doubt things might be different in the brutal and corrupt communist regime that is our new treaty partner Vietnam .  This isn’t an argument about how many claims there will ever be against New Zealand (probably few),  but simply about differential access to justice. Our Courts should be open to all who seek justice in New Zealand (and open more generally), and there should be no special jurisdictions for favoured parties.   And New Zealand law should be made by the New Zealand Parliament, with any interested parties (domestic or foreign) free to make their cases in the public debate here.

Out of interest, I have dipped into a few of the chapters of the TPP is the days since the text was released.  I wanted to focus this morning on bits of Chapter 29, Exceptions and General Provisions, and especially Article 29.3 Temporary Safeguard Measures.  I had some peripheral involvement in New Zealand’s stance on these provisions, but here I just wanted to comment on what has finally been agreed.

The Article is only a couple of pages long, and the key points are here:

1. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining restrictive measures with regard to payments or transfers for current account transactions in the event of serious balance of payments and external financial difficulties or threats thereof.
2. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining restrictive measures with regard to payments or transfers relating to the movements of capital:

(a) in the event of serious balance of payments and external financial difficulties or threats thereof; or

(b) if, in exceptional circumstances, payments or transfers relating to capital movements cause or threaten to cause serious difficulties for macroeconomic management.

Since 1982 New Zealand has not had current account restrictions in place, and since the end of 1984 we have not had capital controls in place.  I hope we never adopt such controls again.  But it is the sort of decision that an elected government should be free to take.

New Zealand, for example, adopted current account convertibility controls briefly during the Great Depression, and then had both capital and current account controls in place from the foreign exchange crisis of 1938 until the early 1980s.  There were legal limits in place on what you could import, how much you spend on an overseas holiday, and official permission was required for, for example, overseas magazine subscriptions.  And that was before starting on the capital restrictions, on New Zealanders having money abroad, and on foreigners have money here.  It isn’t a world I ever want to go back to.

But capital and current account controls have not gone from the face of the earth.  In recent years, one OECD country (Iceland) and one EU country (Cyprus) have put new controls in place, and in the previous 15 years Malaysia and Argentina had also deployed such controls.

It is probably inconceivable to the US –  a very large country, and home of a “reserve currency” –  that such restrictions could ever be warranted outside wartime (unlike, no doubt, numerous other direct controls like FATCA or AML/CFT ones), but for small and highly-indebted countries it is another matter.  If New Zealand were to face a severe outbreak of foot and mouth disease, at a time when financial stresses were heightened anyway, controls might be an option a New Zealand government would want to consider.   Same might go for a severe flu pandemic, of the sort that so much planning was done for last decade, which closed down for a time world financial markets.  There would be costs and benefits to adopting controls, but it should be a choice for New Zealand governments to make.  It is about keeping a full arsenal of risk management options.

So I’m pleased to see that both 1 and 2 made it into the final agreement.  After all, any controls need to be consistent with the Articles of the International Monetary Fund –  which we’ve belonged to since 1961.  The IMF articles don’t put any particular restrictions on capital controls, but require approval from the Fund for any current account restrictions.  That approval is supposed to be provided in advance, but Iceland secured approval retrospectively in 2008, so these aren’t just abstract issues.

But the TPP articles goes further, and in some respects where they go are quite concerning.

Here are the main conditions controls have to meet

(c) avoid unnecessary damage to the commercial, economic and financial interests of any other Party;

(d) not exceed those necessary to deal with the circumstances described in paragraph 1 or 2;

(e) be temporary and be phased out progressively as the situations specified in paragraph 1 or 2 improve, and shall not exceed 18 months in duration; however, in exceptional circumstances, a Party may extend such measure for additional periods of one year, by notifying the other Parties in writing within 30 days of the extension, unless after consultations more than one half of the Parties advise, in writing, within 30 days of receiving the notification that they do not agree that the extended measure is designed and applied to satisfy subparagraphs (c), (d) and (h), in which case the Party imposing the measure shall remove the measure, or otherwise modify the measure to bring it into conformity with subparagraphs (c), (d) and (h), taking into account the views of the other Parties, within 90 days of receiving notification that more than one half of the Parties do not agree;

(f) not be inconsistent with Article 9.7 (Expropriation and Compensation);

(g) in the case of restrictions on capital outflows, not interfere with investors’ ability to earn a market rate of return in the territory of the restricting Party on any restricted assets; and

(h) not be used to avoid necessary macroeconomic adjustment.

4. Measures referred to in paragraphs 1 and 2 shall not apply to payments or transfers relating to foreign direct investment.

5.  A Party shall endeavour to provide that any measures adopted or maintained under paragraph 1 or 2 be price-based, and if such measures are not price-based, the Party shall explain the rationale for using quantitative restrictions when it notifies the other Parties of the measure.

In principle, (c) looks fine –  “unnecessary” damage should be avoided in the same way our Reserve Bank should avoid “unnecessary” exchange rate variability.  But what is unnecessary and who defines it?   And (d) too –  responses should be proportional to the seriousness of the situation, rather than using a minor crises as a pretext of abandoning openness.  I never really looked into (f) when I was involved in official discussions and I’m not starting now.

But here is where I start getting more uneasy.  On my reading of (e), under no circumstances can capital or current account controls be in place for more than 2.5 years.  New Zealand previously had them in place for 45 years, but more relevantly Iceland only this year announced plans to remove controls put in place, in response to a severe crisis, in 2008.    This provision goes well beyond anything in, for example, the multilateral framework of the IMF Articles of Agreement, and even provides a veto power to (a majority of) the other countries on even having controls in place beyond 18 months.

It might seem unlikely that the veto would ever be exercised (such is international politics that rather than upset a partner one could just let the last 12 months of controls run out)…..but, unlike the IMF, disputes under this Agreement can (presumably)  be dealt with through the ISDS process.  So rather than mere political lobbying about whether extending controls is a good idea, interested private foreign parties could seek remedial action.  Could they, for example, take a claim against another foreign government for failing to be stringent enough in evaluating whether any extension of New Zealand’s controls was really warranted within the terms of the agreement?

Which brings us to (h) above  Not avoiding “necessary” macroeconomic adjustment might sound uncontroversial, but…..any such controls substitute, almost by construction, for other forms of macroeconomic adjustment.  One could always let the exchange rate go lower (shifting more resources into exporting), or default (reducing the amount of resources that need to be shifted into exporting).  Is it really appropriate to have such judgements –  about the best mix of policy tools in a crisis – reviewed by courts –  let alone private foreign tribunals?

(g) has long puzzled me, (even though it sounds reasonable) because it has never been entirely clear what it means.

And if 5 has ended up in a reasonable place, it still seems to have a stronger preference for price-based measures (fees and taxes) rather than quantitative restrictions than may really be warranted.  I’m all in favour of price-based measures as a general principle, and think that many of the quantitative restrictions countries put in place are quite costly (think quotas rather than tariffs).  But the track record is that many of the authorities with a strong rhetorical commitment to price-based interventions actually themselves use quantitative restrictions  when under pressure.  I’ve frequently pointed out to people that during the 2008 crisis, short-sales prohibitions were common interventions in many countries (including the US).  Personally I thought they were wrongheaded, but smart people –  and, more germanely, people with a political mandate, disagreed.  I’m not sure I noticed price-based measures in FATCA, for example.   “Temporary safeguard measures” shouldn’t be used very often at all, but if they are used only in extremis it is quite likely that quantitative restrictions will be the most effective, and perhaps even efficient, remedy at times.  As a simple example, when the exchange rate is collapsing, or expected to collapse, almost no credible fee or tax will discourage someone who just wants his or her money out.

But my biggest single concern around the temporary safeguards provisions relates to 4.  This clause prohibits any current or capital account restrictions applying “to payments or transfers relating to foreign direct investment”.    I think that is a bad policy to pre-commit to for several reasons:

•  There is no good reason to preference foreign direct investment over other flows, capital or current
• The agreement contains no definition of foreign direct investment
• This exception opens potentially large enforcement problems.

If anything, one could probably mount an argument for putting the restriction in the reverse.  After all, as the footnote to this article points out “FDI”, as envisaged here, tends to be undertaken to establish a “lasting relationship” –  unlike (say) as foreign investor buying a 90 day bank bill –  and this agreement allows controls for only 30 months at maximum.  If you establish a lasting relationship, isn’t it reasonable to share the opportunities and restrictions of the residents of the country?  In bank crisis resolution for example (eg the OBR), the focus is on quickly re-establishing the liquidity of transactions balance accounts, with much less immediate interest in the liquidity of longer-term claims.  Why reverse things here?   And why are countries agreeing to preference flows that relate to a foreigner’s investment in New Zealand over those of an identical asset (say, another sawmill) held by a New Zealander.  And note that the prohibition here is not just on the capital proceeds of the sale of an FDI asset, but on the earnings of that asset.  Under TPP, it appears that a country could put in place restrictions on a foreign owner remitting interest receipts (from, say, a government bond) abroad, but not on a foreign owner (of, say, a factory or a bank) remitting interest on a related party loan, or on remitting a dividend.  What is the ground for such a differential treatment?  I can’t see it.

The clause has a footnote

For the purposes of this Article, “foreign direct investment” means a type of investment by an investor of a Party in the territory of another Party, through which the investor exercises ownership or control over, or a significant degree of influence on the management of, an enterprise or other direct investment, and tends to be undertaken in order to establish a lasting relationship.  For example, ownership of at least 10 per cent of the voting power of an enterprise over a period of at least 12 months generally would be considered foreign direct investment.

But what, if any, legal force does that have? It is descriptive rather than prescriptive.  That might be fine for statistical classification purposes, at a time when there are no controls.  But it looks to provide no effective buffer against the numerous attempts that will come, if controls are ever put in place, against attempts to get round the law.  If, for example, a foreigner’s government bond matures and they invest the proceeds as 100% of the shares of “XYZ Asset Management Company”, the only asset of which is the proceeds of the bond, is that foreign direct investment (for the purposes of this agreement)?  If it is held in that form for at least 12 months?     People more skilled in financial engineering than I am could surely quite easily invent countless more clever ways of bringing their funds within this ill-defined ambit of “foreign direct investment”.

And all these matters appear to be resolved, when disputes are taken, not openly by domestic courts under domestic law,  or even through state to state dispute resolution mechanisms such as those under the WTO, but by offshore administrative tribunals litigated by individual aggrieved private companies.

For some people on the libertarian side of things, all these objections will be moot.  Who cares, they might argue.  Controls such as these are always and everywhere a bad idea, and anything that makes them harder to enforce is a good thing.  If we must have such provisions in international agreements to fend off the antediluvians, this is the second-best way of rendering them meaningless.

And I can see the logic of their argument. But it doesn’t appeal.  Strong and successful countries make their own laws, and set their own constraints.  Democracy and national sovereignty are probably never absolute principles, but I think New Zealand governments should have the option of imposing these sorts of controls, and trying to make them work, especially in crisis circumstances –  which one could readily envisage lasting longer than 30 months.  The longstanding multilateral framework, reflected in  the IMF Articles, agrees.  If New Zealanders really want to rule out the crisis controls options, that’s fine too.  But write and debate a constitution and establish these economic freedoms in such a national, domestically justiciable, document.

As it is, even our own Treasury and Reserve Bank signed up to a non-binding international declaration the other day which said that “we further recognize that excessive volatility in capital flows can create policy challenges that may require a policy response”.  Personally I’m sceptical, but they signed it.  Are they really saying that in no conceivable circumstances can those “serious difficulties for macroeconomic management” ever last for more than 30 months?  I’d be interested to see their analysis/evidence for that proposition.