The costs of Brexit

That was the theme of a presentation in Wellington on Monday, organised by the research institute Motu, by visiting British economist Richard Harris.  Harris is a professor of economics at the Durham University business school, but had apparently spent some time at Waikato early in his career.

The presentation was promoted as an update on the Brexit negotiations, seven months into the two year Article 50 notice period.  Of course, it takes not much more than a cursory glance at your British media outlet of choice to know that things are not going that well, not helped by the tenuous hold on office the current government has.   Competing agendas all round don’t help either.  Plenty of people in the British government –  and the Opposition –  didn’t want to leave.  For them, minimal change from the status quo would be the best outcome. But for those who actually favoured Brexit that solution would, understandably be anathema –  the goal for many of them was to restore the UK’s freedom of action to that of a typical sovereign state.    And on the other side, some countries face pretty bad outcomes if there is a hard British exit.  For others it isn’t much of an issue. For some it might even be an opportunity, to attract multinationals –  including in the financial sector – that have operations currently based in Britain.    And although everyone knows that rising trade barriers comes at a (likely) cost to all countries, the EU doesn’t want any other countries –  or regions –  getting the idea that leaving the EU was a serious option.

Harris’s presentation helped me see more clearly where the EU “divorce bill” demands are coming from, and put the numbers in some sort of context.  At present the UK pays a net 14.6 billion pounds a year into the EU, and the sort of numbers observers like the FT think the EU might accept are only the equivalent of two or three years’ “membership fee”, in a club that apparently operates five year budgets.  At present though, as the FT observes, a number acceptable to Brussels would be “deadly” in Westminster.

It was also interesting to see some numbers on how restrictions on trade between the UK and the rest of the EU would rise if there is no trade deal and the two sides fall back to trading on WTO terms.   On goods, tariffs would rise from zero at present to around 4.4 per cent on average.   On services, where barriers are mostly non-tariff, the restrictions would rise from a tariff-equivalent of around 2 per cent to something nearer 8 per cent.   In principle, the UK could offset this to some extent by securing early trade agreements with other countries –  including countries that the EU does not have deals with –  but good deals, with significant countries, aren’t likely to be secured easily or quickly.  As various commentators have noted, the EU-Canada trade agreement took eight years. New Zealand is already among several countries objecting to early EU/UK proposals to divvy up agricultural import quotas.

Even though there is a lot of talk about smoothing the customs barriers between the UK and rest of the EU –  including on the Ireland/Northern Ireland border –  to faciliate, for example, the value-chains in manufacturing that rely on the seamless movement of goods, there doesn’t seem to be any great optimism as to whether any of these schemes can be made to work well.   That matters, even more than to the UK, for Ireland in particular, which has a very large share of its trade with the UK (and not just with Northern Ireland).  The Irish have been making opportunistic bids to try to semi-detach Northern Ireland from the rest of the UK.

It was pretty clear that Harris hadn’t voted for Brexit, and didn’t support it now.  But he had a pretty hard-headed assessment: the decision had been made and there was no imaginable way it was going to be reversed.   He couldn’t see how effective deals could be in place in March 2019, and even talk of transitional periods beyond that had all sorts of (technical and political) problems.  He envisages a pretty “hard Brexit”, and is very gloomy as to how the UK will cope.

In fact, that was one of the odder aspects of his talk.  He presented a (familiar) chart showing that in the 20 years to 2007. British productivity growth had been faster than that in most other major advanced economies.  But since 2007 there has been no productivity growth at all in the UK.  No one quite knows why, or even how much of what we see might be measurement and how much genuine.  Performance has been poor recently, but that has nothing apparent to do with Brexit.

And yet Harris used this record to claim that if Britain was to take advantage of Brexit, it needed to have a high productivity economy to benefit from comparative advantage.  He said it twice, so it presumably was an intentional statement.  But Stage 1 economics students learn that everyone has a comparative advantage: economy B might be better at producing all sorts of different goods that economy A (that’s absolute advantage), but comparative advantage just tells you that economy A will nonetheless be occupied producing the things it is relatively less bad at producing.     Misunderstanding that point didn’t fill me with confidence in the rest of the presentation, although I’m guessing he just meant that one might be more optimistic about British economic outcomes –  in or out of the EU –  if it was managing decent productivity growth now.

Harris did present the results of a couple of modelling exercises that have been done on how large the real economic costs of Brexit might be.  They usefully highlight that the costs won’t just fall on the United Kingdom –  indeed, one of them envisages job losses (transitional presumably) twice as large for the rest of the EU as for the UK (the EU is of course much larger).    There are losses in this scenario because, even with full free trade with the rest of the world (which won’t happen any time soon), there are typically fewer profitable trade opportunities with places further away than with places close to home (one of NZ’s problems).

In one paper (by Vandenbussche et al), it is estimated that the level of British GDP will fall by 4.5 per cent in a “hard Brexit”.   What I hadn’t realised –  or thought about before –  is that Britain might not be the biggest loser.  In this particular model, Irish GDP would fall by almost 6 per cent, and that of Malta –  with close historic ties to the UK –  would also fall by 5 per cent.    If a 5 per cent loss of GDP seems large, no one really knows the likely absolute magnitudes. Harris quoted estimates from another study by Dhingra et al: they in turn had bad and less-bad scenarios, but the central estimate of lost GDP for the UK was around 2 per cent.

There is a pretty widespread view among economists that these costs, whatever the precise number, are both large and avoidable.  Of course, they might be avoidable, if Brexit was to free up Britain to adopt far-reaching microeconomic reform and liberalisation.  Sadly, that doesn’t seem remotely likely at present –  and of course, many of the costly restrictions the UK imposes now (eg land use restrictions) are entirely home-grown.

Instead, economic elites lament the choice to exit the EU and wish, longingly, that it could be reversed.  That sentiment is perhaps particularly evident in places like the IMF and the OECD –  and Harris cited quite a bit of material from the latter organisation, which has an institutional bias away from the national in favour of the multinational.

I suspect, by the tone of the questions, and the sympathetic murmurs when Harris made particular points, that there weren’t many people in Monday’s seminar who were sympathetic to Brexit.  I am.  Were I a Brit, I’m pretty sure I’d have voted for it –  although, in truth, I’m not sure I’ve ever voted in New Zealand for a programme that might reduce GDP per capita by 4 per cent.  But Brexit has just never seemed primarily like an economic issue, and that seems to be the difference between the public –  polls suggest they are still pretty evenly divided as they were last June –  and most economists.

And so I stuck up my hand and suggested that if we’d been doing this sort of modelling 60 years ago, as territories pondered the possibility of independence from Britain, the results would surely have shown that, for almost all of them, they would be worse off economically than if they’d stayed with Britain.  (And that modelling would never have allowed for the gross mismanagement that followed in many of the newly independent African countries in particular).  And yet if they had been presented with estimates of a 5 per cent loss of GDP, how many would have turned down the chance to be independent – to be free?  Even now, decades on, few probably regret the independence choice –  Somalis might be an exception.   The essence of my point of course was along the lines of why shouldn’t Britons today make a similar choice about the EU.  (And, of course, a 4 per cent loss of productivity sounds big, but it is the loss of 2 or 3 years productivity growth in normal times, invisible over a 50 year horizon.  Adding another week’s annual leave probably reduces GDP per capita by a couple of per cent.)

I’ve made this point here previously, but I was interested in how Harris was going to respond to it.  His response was to acknowledge that many Scots had certainly favoured independence, even at an economic cost – although of course they, like the Quebecois in the 1990s – decided to stay part of the larger country.  But then he fell back on avoidance, arguing that the issues were different for India or Zambia, as their cultures had been squelched by the British etc, and no one could suggest that anything of the sort could be said of Britain and the EU.  Had I had the chance of a rejoinder, I’d have noted that my points would have applied to the choices New Zealand, Australia, and Canada (and Ireland –  although the cultural issues were a bit different) had made to progress towards full economic and political independence.  It may well have come at a cost, but few then –  and fewer now –  will have regretted the choice.  And in all three countries the predominant population was English.  Probably few Slovaks regret their divorce from the Czechs.

Harris’s fallback was that “the EU was always only an economic club, and it remains an economic club”.      That was the conceit of many in Britain.  It was never the vision of the founders of the EU, or of those driving it today.  The very treaties envisage an ‘ever-closer union”, and even today newspapers such as the FT are full of talk of plans for closer banking or fiscal unions, even talk of an EU finance minister.   New entrants to the EU – although not Britain, Sweden and Denmark –  are obliged to commit to enter the euro.  And –  as a matter of conscious and deliberate choice –  being part of the EU means individual nations surrender the right to legislate for themselves in many areas.  That is a (lost, or foregone) freedom that many Britons seemed (and seem) willing to pay some price to reclaim.  If you don’t value the nation state –  or you aspire to some mega European state –  you’ll think that choice irrational.  But most people do seem to value the nation state –  and not just in the UK.    And the British exit polls last year suggested that it was just those sorts of “chart one’s own destiny” considerations that counted with those voting to leave.

Nearly half (49%) of leave voters said the biggest single reason for wanting to leave the EU was “the principle that decisions about the UK should be taken in the UK”. One third (33%) said the main reason was that leaving “offered the best chance for the UK to regain control over immigration and its own borders.” Just over one in eight (13%) said remaining would mean having no choice “about how the EU expanded its membership or its powers in the years ahead.” Only just over one in twenty (6%) said their main reason was that “when it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it.”

In the end, who knows whether it will matter much.  All the modelling assumes that the EU itself carries on much as it is.  A pessimist – perhaps an optimist –  might wonder whether the EU itself will last in its current form for much longer.  Public opinion in other EU countries seems to ebb and flow.   The next recession –  whenever it is –  is just going to accentuate the tensions already apparent in many countries, given that few EU countries have any material “fiscal space” and the ECB is likely to go into the recession with interest rates already at or below zero.  Perhaps in the end Britain will prove to be a pathbreaker –  something the eurocrats and EU-oriented elites must fear very deeply.

Harris concluded with a couple of slides making the point as to how little trade New Zealand firms/individuals and those in the UK now do.   He was inclined to the view that, therefore, what happens around Brexit doesn’t really matter to us.   I’m not sure he is right there –  even setting aside wishful thinking about full free trade between us, including in agriculture.    Even in the transition, a disruptive hard Brexit is the sort of event that could –  in the wrong circumstances –  matter for the world economy in 2019.  And for a small country, looking to materially increase its export orientation, we should certainly be hoping that a country of the size and sophistication of the UK can make it –  and prosper –  alone.  If they can’t, it wouldn’t bode well for us.

Reflecting on foreign ownership

[An Australian website yesterday reproduced, without my permission, my entire post on the new government’s immigration policy, running it under the heading “Is Jacinda Ardern a fake?”.   That heading does not –  even in the slightest –  represent my view.  I’m assuming the new government will do as they said in their manifesto.   And while I’m a bit sceptical as to how committed the new Prime Minister really is –  the policy having been adopted under her predecessor and she never having talked about it in public fora – the point of the article was (a) that the policy itself does not represent any significant change in the likely future contribution of immigration to population growth, and (b) that various overseas commentators have taken the, quite clearly laid out, Labour policy as something much more dramatic than it actually is.]

A few weeks ago, my 14 year son, mad-keen on ancient history and starting to study economics as well, brought home from the library a book about the economy and society of ancient Greece.  I’m not sure he read much of it, but I found it fascinating.   Among the things I learned was that the ancient Greek states, Athens most notably, generally banned foreigners – even resident foreigners – from owning land.   These states were typically actively engaged in international trade, and often encouraged foreigners with particular specialised skills to settle among them.  So it clearly wasn’t an autarkic approach –  some sort of isolation and national self-sufficiency.

But it caught my attention partly in the context of the change of government here, and the proposed new restrictions on non-resident foreigners being able to purchase existing dwellings.   But the issue goes wider than that, and the ambivalence about foreign investment and foreign ownership of New Zealand assets dates back decades at least.    And the Labour-New Zealand First agreement commits to

“strengthen the Overseas Investment Act and undertake a comprehensive register of foreign-owned land and housing”

This in a country where the OECD already rates our existing restrictions on foreign investment as more severe than those of almost any other advanced country (even if there is some genuine debate about how restrictive our screening regime –  what counts in the index –  actually is).

Of course, the proposed ban (which could yet turn into a heavy tax, to get around FTA constraints) on foreign purchases of existing properties, isn’t really much of a ban on foreign ownership at all.  Non-resident foreigners would be able to purchase a brand new house, with no particular restrictions, but not an existing house.    Since new and existing houses are, to a considerable extent, substitutes –  especially if you aren’t planning on living in the house – it isn’t even clear why the proposed ban would do more than throw a little sand in the wheels.   And land-use restrictions have been the main source of driving house+land prices far beyond sensible levels –  the best alternative use of those resources.   So it isn’t clear why a restriction on non-resident foreign purchases of existing houses will do anything to lower the price (increase effective supply) of developable urban land.   If governments can’t, or won’t, fix the land market, there might be more logic in a total ban on non-resident foreigners purchasing dwellings in New Zealand.   Were there to be strong evidence of a significant effect on our market of such non-resident foreign purchases, I could see a reasonable second or third-best case for such a restriction.  I’d prioritise the ability of our own people –  immigrant or native –  to buy a house+land over the freedom to sell to non-resident foreigners.    That’s a value judgement, but one I’m comfortable with.

To be honest, I’m not sure what to make of the data we have.  Lots of people are quite sceptical of the LINZ data, but I’m still struck by how high the non-resident numbers actually seem to be, at least in Auckland and Queenstown (the numbers are very small elsewhere).   For the first six months of this year, almost 5 per cent of Auckland gross sales were to buyers wholly or partly non tax residents of New Zealand.  In Queenstown-Lakes, the proportion was more than 10 per cent.   There were non-resident sellers as well, of course.  And some of those people (on both sides) were New Zealand citizens –  eg a New Zealander who has settled in Australia, no longer treated as a tax resident of New Zealand, and a few years later sells a New Zealand property.  But at a time when Chinese data show that capital outflows from China have hugely diminished

cap outflows

it is rather surprising how many purchases (net) were still being made by Chinese tax residents, even on the LINZ data with all its limitations.    (In Auckland, net Chinese purchases make up more than the total net foreign purchases –  ie people tax resident in other countries were net sellers.)   And recall that China is the issue simply because the place is currently so badly governed –  absent the rule of law –  that its own people don’t feel safe keeping their money in their own country: we never had an influx of Japanese, French or British purchasers.

With a well-functioning urban land market, sales of houses/apartments to non-resident foreigners  –  even ones that just sat empty –  could be just a modestly rewarding export industry.   But we are a very long way from that sort of well-functioning market.

In Eric Crampton’s piece the other day, he highlighted that the proposed restriction would affect those here on work visas, as well as those who were not resident at all.   If so, that was something I hadn’t realised.   But his argument against drawing the line there wasn’t particularly persuasive

If someone is building a life here, it shouldn’t matter what visa they’re on.

But it does.   If you are here on a student visa, or a temporary work visa, you might well hope you are now on a path to “a life here”.  There might even, in some cases, be an implied expectation that that is how things will turn out.  But New Zealand has not made a decision, at that point, to grant your wish.  It does that only at the point where you get a residence visa (and then permanent residence).  At that point we’ve said you can stay,  but not before.  If there is going to be ban or a tax, I don’t have a strong view on where the line should be drawn (there are avoidance issues wherever it is drawn).  In practice though, not many people going to another country (or even another city) for just a couple of years will buy a house –  the transactions costs are just too high –  so if we are going to impose restrictions, I’m not convinced drawing the line in a place that banned those on temporary visas would be particularly problematic.

But restrictions on non-resident purchases of urban dwellings are mostly a second-order distraction from the real regulatory failures that have rendered house prices here –  and in similar places abroad (eg Australia, UK, California) –  so unaffordable.

Perhaps more sensitive, and more difficult, issues are around other foreign ownership issues.  In reading around how they did things in Athens, I noted that foreigners might not have been able to own property, but they had the same access to the courts as citizens.  These days, however, we –  and many other countries –  go one further and give foreign investors better access to dispute resolution than we provide to domestic investors, through the investor-state dispute settlement (ISDS) provisions included in numerous preferential trade and investment agreements, including TPP (and presumably the replacement for it, now close to finalisation).    I wrote about these provisions back in 2015, quoting a writer for the New Yorker

“these provisions have been opposed by an unusual coalition of progressives and conservatives”

and a contributor to –  not exactly left-wing – Forbes magazine that ISDS provisions represent a

“subsidy to business that comes at the expense of domestic investment and the rule of law”

In a country with a good quality legal system, it should simply be offensive and unacceptable that we provide foreign investors access to different courts and dispute settlement procedures, under different rules, than are available to domestic firms (even in the same industry).   Equal status before the law is –  or was –  one of the cardinal principles of our democracy.    At very least, citizens should always have at least as good rights as non-citizens or non-residents.   (And that should apply to our citizens when operating in other countries, relative to the citizens of those countries –  but that is an issue for those governments, not ours.)

What of the foreign investment itself?

There are easy cases, at either end of the spectrum.  I don’t suppose anyone much is going to have a problem with a foreign investment fund owning an office block in Queen St.  And I don’t anyone would have opposed restrictions if, say, the Soviet Union had found willing sellers for the whole of Stewart Island.

The hard stuff is where to draw the line between those extremes.   There is a case –  I think generally quite a good one –  for a pretty relaxed view for most potential buyers and most potential assets.  In part, that is a property rights view.  If I own an asset and want to sell it, government restrictions on who can buy the asset lowers, probabilistically, the price I can command.  It is, in the jargon, an uncompensated regulatory taking.     Then again, a lot of the value of any (location-specific) asset arises from choices society has made collectively, about institutional quality, rule of law, good governance etc.  Auckland airport, for example, wouldn’t be worth much if New Zealand were an ill-governed hell-hole.

There is also the argument that the New Zealand and, in time, New Zealanders generally will benefit most if the assets are owned by those best able to utilise them.    When foreign investors bring technology or management expertise to a New Zealand industry or opportunity that isn’t as developed here, it is likely that in time there will be a wider benefit to New Zealand.  That was how, for example, Tasman Pulp and Paper was set up, under government sponsorship in the 1950s.  Or Comalco.  (And, yes, I deliberately choose examples where there might be some doubts as to whether these firms should have established here in the first place.)

There are also diversification arguments.  It bothers some people, but doesn’t really bother me, that most of our banking system is foreign-owned.  There are some possible downsides –  and we might have been better off if the foreign ownership was not so concentrated in Australia –  but my reading of the international (and New Zealand) experience is that we are probably better off (more stable) for having a largely-foreign owned banking system.

There are also bureaucratic competence/incentives arguments. Our current overseas investment act in many cases requires demonstrating that a proposed foreign purchase would be “beneficial to New Zealand”.   Beyond the evidence of, say, a foreign buyer being willing to offer the highest price, how comfortable can we be that officials and politicians have the ability or incentives to make those judgements correctly?

There are also arguments about debt vs equity.    You might, in some cases, worry about control passing to foreign owners.  But if domestic owners are reliant on lots of foreign debt there can be different, but at times more intense, levels of vulnerability.    Debt can be called up, or simply not rolled over.

Foreign investment has played a significant part in New Zealand’s economic history, and its economic development.  Sometimes in quite odd ways: the protectionist insulationist policies of post-war New Zealand encouraged quite a high degree of private direct foreign investment, as the most cost-effective way for foreign firms to get their products into the New Zealand market (inefficient and costly as it may have been for New Zealanders).  But my reading of the New Zealand evidence and data is that foreign investment restrictions aren’t to any material extent what holds New Zealand’s productivity performance back.  It is a more a case of there being too few good profitable new potential investment opportunities, whether for domestic investors or foreign.

None of this is really an argument for a laissez-faire approach, even if I’d still be more hands-off than most New Zealanders might.      National cohesion and national identity aren’t easy to pin down, but are both real and important.  And part of that –  perhaps especially in a small country –  is the control/ownership of land.   I find it quite plausible that there might be international agricultural operators who could add new and different value to New Zealand operations through ownership and management of substantial parcels of agricultural land.  But if, on the other hand, a growing number of wealthy offshore people simply wanted to own South Island stations and install local managers to farm much as they always have, I also don’t care very much if political unease is real enough that we end up simply saying “no” to such purchases on a large scale.  Again, at an extreme, if non-resident non-citizen buyers ended up owning 80 per cent of the land in some locality –  be it Northland or central Otago, or wherever –  then I think we’d have undermined something about what it means to be New Zealand –  given undue weight, including in local government, to the interests of people who aren’t part of this polity – in that area.     A country is some mix of people in some specific place; a bundle of tangible people and land, not just an idea.

How real are those particular risks?  I’m not sure –  perhaps the new register will help give us a better sense.  And there are plenty of countries –  other open liberal societies – that place few or no restrictions on such purchases.    But perhaps things are a bit different in a small country?

And then there are the national security dimensions, which seem to be treated too lightly here.  A standard response is “but the local government can always regulate things” .  I don’t think it is typically an adequate response if, say, a hostile foreign power owned key telecoms networks or ports/airports: regulation and governments just aren’t that good, and can also become too responsive to the interests of the overseas investors.    Of course, confronting this issue also involves identifying the minority of countries that count as potential “enemies” and, on the other hand, which are countries where there is (a) a substantial commonality of interest, and (b) where investors can be reasonably assumed to be working in their own interests, not those of their home governments.   At a time when the Soviet Army was just across the border, the West German government would have been crazy to have allowed Soviet interests to have purchased and controlled major West German infrastructure or technology assets.   We’d have been crazy to sell Stewart Island to Soviet interests.

Today’s Soviet Union is China, with the difference that these investment hypotheticals are increasingly real, used as a direct means of extending political reach.   That is nothing about race, and everything about (geo)politics.  I don’t think that taking these issues and threats seriously means banning all, or perhaps even most, Chinese foreign direct investment.  But it means a greater degree of realism, than tends to have pervaded recent governments, that their interests are not our interests, that all or most Chinese corporates are effectively under the thumb of the government and Party, and that not all voluntary transactions are likely to be beneficial for New Zealand as a whole even if they benefit both the buyer and the immediate seller.

There is no particularly strong conclusion to this post.  Drawing appropriate lines –  and translating them into legal rules –  isn’t easy, and that is often a good reason for restraint.  And yet neither is defining, or  fostering and sustaining, nationhood.  But that something is hard isn’t an excuse for simply ignoring the potential issues.  Part of doing that well is perhaps first fostering a compelling and convincing sense that governments are governing in the interests of New Zealanders as a whole.  Of course, different people will see those interests, and the policies that best serve them, differently –  that’s politics. But finding the right answers –  as perhaps around immigration –  is unlikely to proceed best by simply exchanging slogans.

Reviewing government assistance to business

The Australian Productivity Commission’s latest annual Trade and Assistance Review was released quite recently.  These, statutorily required, reviews contain

the Commission’s latest quantitative estimates of Australian Government assistance to industry

as well as useful discussion and analysis of key recent developments in the trade and industry assistance area.  As the Commission notes in the Foreword to this year’s report

Views inevitably differ on what constitutes industry assistance and whether it is warranted. Fundamental to these questions is transparency of measures. The annual Review seeks to identify government arrangements that may be construed as assistance, as well as their target, size, and nature. This information provides a basis for considered assessment of the benefits and costs of the arrangements.

Transparency  alone usually can’t stop daft policies being adopted or continued, but without good empirical estimates and disinterested analysis it is harder to push back against the special interests lobbying governments for this deal or that.  Such deals are almost invariably dressed up as being in the public interest, but perhaps rarely are.

The Commission highlights one particularly egregious example in this year report –  the decision to build the new submarine fleet in Australia  (characterized by many as marginal seat retention scheme  –  and the Cabinet minister most often mentioned did retain his seat at the recent election).  As the Productivity Commission’s report tartly observes

Paying more for local builds, without sufficient strategic defence and spillover benefits to offset the additional cost, diverts productive resources (labour, capital and land) away from relatively more efficient (less assisted) uses. It can also create a permanent expectation of more such high‑cost work, as the recent heavily promoted ‘valley of death’ in naval ship building exemplifies. Such distortion detracts from Australia’s capacity to maximise economic and social wellbeing from the community’s resources. The recent decision to build the new submarines locally at a reported 30 per cent cost premium, and a preference for using local steel, provides an illustrative example of how a local cost premium can deliver a very high rate of effective assistance for the defence contractor and the firms providing the major steel inputs (box 3.1). While based on hypothetical data, the example reveals that the effective rate of assistance provided by purchasing preferences can be higher than the peak historical levels recorded for the automotive and textiles, clothing and footwear industries prior to the significant economic reforms of protection. It is notable that this cost premium does not include any delays in deploying the new submarine capability.

Effective rates of protection, in 2016, higher than those provided to automotive, textile, clothing and footwear industries in the bad old days of high industry protection.

I wrote briefly about last year’s review, which included material which the Sydney Morning Herald described as scathing attack on preferential trade agreements of the sort that Australia (and New Zealand) governments have been enthusiastically signing.  The Australian Productivity Commission  –  a body strongly committed to open and competitive markets – has a well-established record of skepticism around the wider economic benefits of such deals.  Here is their box summarizing the issues and concerns.

Box 4.1           Conclusions in regard to the merits of trade agreement

The Commission has previously raised questions about the merits of trade agreements (including PC 2010, and the Trade & Assistance Review 2014‑15). The overall conclusions are as follows:

·       Multilateral trade reform offers potentially larger improvements in national and global welfare than a series of bilateral agreements. While the slow progress of the Doha Round of multilateral trade reform has accelerated preferential agreement making, the trade‑diverting effects of bilateral agreements should not be forgotten.

·       Australia gains more from reducing its own tariff barriers than from the tariff reductions of a bilateral trade agreement partner.

·       The benefits of increased merchandise trade emanating from bilateral trade agreements have been exaggerated.

·       Different and complex rules of origin in Australia’s preferential trade agreements are likely to impede competition and add to the costs of firms engaging in trade.

·       The nature and scope of negotiating remits should be assessed from a national structural reform perspective before entry into negotiations, rather than primarily for export opportunities. The text of proposed trade agreements should be made public and a rigorous analysis independent of the negotiating agency published with the final text.

·       The Australian Government should seek to avoid the inclusion of Investors‑State Dispute Settlement (ISDS) provisions in bilateral and regional trade agreements that grant foreign investors in Australia substantive or procedural rights greater than those enjoyed by Australian investors.

·       The history of Intellectual Property (IP) being addressed in preferential trade deals has resulted in more stringent arrangements than contained in the multilateral agreed Trade‑Related Aspects of Intellectual Property (TRIPS). Australia’s participation in international negotiations in relation to IP laws should focus on plurilateral or multilateral settings. Support for any measures to alter the extent and enforcement of IP rights should be informed by a robust economic analysis of the resultant benefits and costs.

It isn’t exactly the enthusiasm of New Zealand or Australian governments for deals such as TPP (although the Commission does not comment at any length on that specific deal).

One can always argue what value publications like these add – given the fondness for daft policies that governments continue to show. But given how badly the incentives are skewed against citizens, provisions that require officials to publish reports of this sort seem appropriate. Information is one of the few tools citizens have to push back.

In New Zealand, the Taxpayer’s Union has done sterling work in highlighting some of the cost of “corporate welfare”, but it might be a good part of improving New Zealand’s economic governance if provisions requiring an annual report of this sort were included somewhere in New Zealand legislation.  At very least, it would help to prompt something like the annual modest round of stories in the Australian media about just what governments are doing  –  and at what cost –  in this area.  In a small country, with a lightly-resourced media, we probably need such official reports even more than Australia does.

Surely we deserve better than this?

No, that was not a reference to the latest release from the Reserve Bank on investor finance restrictions.  We do deserve better from them, but I’ll elaborate on that later.

Somewhere along the line I must have signed up for releases from the Minister of Trade, Tim Groser.  I don’t recall doing so, but this release turned up earlier this afternoon

Good afternoon Michael

There’s been a lot of debate recently about the proposed Trans Pacific Partnership (TPP).

The TPP aims to create a regional free trade agreement involving 12 Asia Pacific countries, including Australia, Japan, the United States, Canada, and New Zealand. These 12 countries have combined a GDP of US$27 trillion (NZ$40 trillion).

If we are able to secure a deal, this would deliver massive benefits to the New Zealand economy. It will help to create more jobs for New Zealanders and lift incomes.

“Massive benefits” sounds good, if perhaps implausible (few things governments do actually deliver “massive” benefits).    Whatever the deal, it probably won’t create more jobs either –  higher returns for the jobs we have, and perhaps some different jobs as we gain from more trade, but you can have full employment under tight controls (New Zealand in the 1960s) or under free trade.

Trade is incredibly important to New Zealand. As a small, island nation we need to trade with other countries to ensure we are not left behind. We can’t get richer by selling stuff to ourselves.

The reason the Government hasn’t released much detail to date is because the negotiations are still underway. Just like any normal business deal and other free trade agreement New Zealand has reached, these negotiations are always conducted with a degree of discretion.

The words “extreme understatement” spring to mind in response to that last phrase.

This is about getting the best possible deal for New Zealand, not a deal at any cost. We are confident we will reach an agreement that is in the best interests of New Zealand

Good to know, but the paragraph no longer has the tone of delivering “massive benefits”.

If we are able to secure a deal, New Zealanders have an opportunity to review it and provide feedback. Any deal will require examination by a Parliamentary Select Committee where members of the public will be able to make submissions. Legislation will also need to be passed, which will involve further scrutiny by Parliament, before it takes effect.

As I’ve already mentioned, we will not be signing a deal that’s not in New Zealand’s best interests. I firmly believe the TPP will be hugely beneficial to our country if we are able to secure a deal.

Since the Minister doesn’t seem to know whether a deal will yet even be possible, how can he be sure a deal will be “hugely beneficial”? It is plausible, perhaps, that a deal might offer huge benefits, but surely a deal that is only just good enough to sign must also be possible – otherwise he wouldn’t be uncertain whether there would be a deal at all. And given the uncertainty about any estimates about the impact of micro reforms, a deal he initially thought to be beneficial to New Zealand could turn out later not to have been so. Or vice versa.

I suppose ministerial missives like this are simply meant to lift the spirits. In this case, I can’t see how it works. If he has nothing concrete he can say, perhaps he should just stick to “we’ll be working hard to reach a deal that will benefit New Zealand”.

And the case for an intensive independent review of the costs and benefits of any deal by, say, the Productivity Commission remains strong.