Mr. Charles Holmes Finny

Transcription

1 New Zealand s FTA Strategy And Lessons For Taiwan Mr. Charles Holmes Finny (Speech to Chung Hua Institute for Economic Research, Taipei, 31 March 2010) I yesterday gave a speech on New Zealand s FTA strategy to officials at the Ministry of Economic Affairs. To place my comments today in context I have repeated in the text of the speech all my comments of yesterday. However, in delivery I will only summarise my comments of yesterday and focus mainly on lessons that Taiwan might like to learn from the New Zealand experience. I was on Monday present in Hong Kong at the signing of New Zealand s eighth free trade agreement, the Closer Economic Partnership arrangement with Hong Kong. The other agreements are with Australia, Singapore, Thailand, the Trans Pacific Strategic Economic Partnership, China, ASEAN, and Malaysia. In a month or so, New Zealand s ninth agreement that with the Gulf Cooperation Council is due to be signed. New Zealand has active negotiations underway with Korea and the eight party Trans Pacific Partnership, and negotiations are about to begin with India. There is an FTA type process also underway with the countries of the South Pacific. Up until 2000 New Zealand had only one FTA the Closer Economic Relations Agreement with Australia. That was negotiated in the early 1980s. Why was there such a big gap between New Zealand s first and second FTAs and why has there been such intense activity in the past decade? And where is this activity likely to lead? New Zealand was rather slow to embrace the goal of free trade. Up until the negotiation of CER with Australia New Zealand had a highly protected economy. We did not believe that our industry could cope with competition from abroad. Even our highly efficient agriculture sector was protected by tariffs and was heavily subsidised. There was clearly strong public support for this type of trade regime. Why did attitudes change so quickly and to such a large degree? How could New Zealand move so fast from being one of the most protectionist members of the GATT to one of the strongest supporters of free trade? Maybe the easiest questions to answer are the last two. Attitudes changed so quickly and the economy s position changed so radically because protectionism doesn t work. New Zealand was for much of last century the wealthiest, or one of the wealthiest countries in the world in per capita terms. Even in the early 1960s we were in the top two or three countries in per capita wealth terms. But excessive control, the heavy hand of Government on the supply of services, and huge border protectionism saw our relative position sink fast. By the early 1980s we were a broken system. It was clear that radical change was needed and, at least initially, that radical change enjoyed substantial public support. In the trade policy field change was a bit more gradual than some of the reforms introduced in the domestic economy, but it had substantial implications for domestic economic reform. 1

2 The CER agreement with Australia was agreed with some reluctance by the Muldoon Government ( ) which feared a backlash from vested interests, and which doubted New Zealand s ability to compete internationally, even with our closest neighbour Australia. The reality was different from the pre agreement fears. Our producers did face new competitive pressures, but also found that they had new opportunities in a market of over 20 million consumers, as opposed to the 3 million that had existed previously. And to their surprise they found that they could compete. The original agreement with Australia envisaged a 15 year transition to free trade in goods. Such was the success of the agreement that the best manufacturers, and the agricultural interests, many of whom had opposed the original agreement, were 4 years later beginning to campaign for an acceleration in the 15 year time frame. The first review of the agreement in 1988 saw an acceleration of the timeframe for full free trade in goods so that this was achieved from 1 January Services were also added to the ambit of the agreement well in advance of GATS. By the mid 1990s most of the barriers to free trade in services had been removed and Australia and New Zealand began mutually recognising or harmonising standards and professional accreditations. Many feared that when CER was signed Australia would do better from the agreement, purely because Australia was by far the larger economy I see similar fears being expressed in Taiwan over the potential impacts of the current negotiation with China. The reality for New Zealand was somewhat different within a couple of years the Australians were complaining that we were doing disproportionately well under CER. Indeed the agreement has been an enormous success. Australia has become our largest export market and our largest source of imports even bigger than China! And last year the close links with Australia were enormously helpful in keeping the recession in New Zealand a shallow one. The FTA with Australia was enormously helpful in opening up the New Zealand economy. It gave our businesses more confidence to operate internationally. It was also helpful to Government in that it was easier to justify some difficult domestic reforms in the context of their being part of an international agreement. Both China and Taiwan used the same tactic in their WTO accessions. Aside from the opening with Australia, the trade policy game for New Zealand in the late 1980s and early 1990s was very much about the GATT Uruguay Round. For the first time agriculture was a central part of the GATT negotiations. New Zealand was to eventually benefit from improved market access, and substantial relief from the huge distortions that had previously been a factor in agricultural trade as a result of export and domestic subsidies. That was the good news. The bad news was the impact that NAFTA had on our exports to Mexico. We lost complete markets for some products once the US and Canada gained free entry to Mexico while we still paid high tariffs. We learned first hand the negative side to trade diversion. We realised that there were both offensive as well as defensive reasons to negotiate free trade agreements. This contributed to a review of our trade policy and the development of a trade strategy. It talked about a three track policy, but in effect it contained four tracks we were committed to trade liberalisation it was a good thing and we would pursue opportunities at four 2

3 levels multilateral liberalisation through the GATT/WTO process, we would be happy to negotiate regionally, bilaterally and if that did not work, we would continue our unilateral liberalisation of the economy. We realised that the real benefits of free trade were in the domestic economy. After the Uruguay Round was concluded, the principal focus of activity was in preparing the agenda for the next WTO Round, securing the accession to the WTO of China and Taiwan, and in testing the limits of APEC and the OECD to deliver liberalisation outcomes. These became the EVSL and MAI endeavours. Both of which essentially failed, though there are some elements of the EVSL process still on the WTO DDA agenda (fish subsidies, chemicals, environmental goods and services). There was a serious exploration of a possible FTA with Canada but that failed when the Canadians realised that New Zealand was insistent on comprehensiveness. And much effort went into a process nicknamed P4 (the Pacific 4) which was meant to be a free trade agreement between Australia, New Zealand, Singapore and the US. That also failed, for reasons that are quite complex. Within the New Zealand trade policy establishment there was some disagreement on the way forward. Some doubted the possibility that other countries would want to negotiate free trade with New Zealand. Surely we were too small, too good at agriculture and too liberal hadn t our unilateral liberalisation spend our already limited negotiating coin? Some others realised that if we were to make progress it would be more for strategic reasons than for reasons of direct trade benefit. In that context a proposal was put to Singapore about the possibility of Singapore and New Zealand setting an example by negotiating a high quality FTA covering goods, services and investment. We argued that this might encourage others to think again about their strategies, and that they too might decide eventually to join in. Rather than a top down strategy to regional liberalisation along the lines of FTAAP we were suggesting a bottom up, or building block approach. Singapore had likewise been working on the assumption that it was too small and too open to be attractive as an FTA partner. Singapore agreed to be part of our experiment, and the rest is history. Since the conclusion of the New Zealand Singapore Agreement in 2000 there has been a veritable explosion of FTA activity within the region. Singapore, the small, open economy now has one of the biggest global networks of FTAs. New Zealand is not that far behind. And interestingly New Zealand now has three FTAs with Singapore, and is negotiating a fourth. We have our bilateral deal, we have the Transpacific Strategic Economic Partnership (NZ, Singapore, Chile and Brunei), the ASEAN Australia New Zealand Free Trade Agreement, and we are negotiating the TPP (Australia, New Zealand, Singapore, Chile, Brunei, Peru, Vietnam and the US). The New Zealand China FTA has been New Zealand s most important FTA negotiated since our original FTA with Australia. In the year and a half since it has been in force it has already had a clear and positive impact on our trade with China. China has become our second largest trading partner our second largest source of imports and, historically last week, it became our second largest export market. In 2009 the world saw one of the largest contractions in international trade in history. Yet New Zealand exports to China grew by over 60%! In the first 6 months of operation the number of New Zealand exporters trading with China grew 10%. 3

4 Why would China want to negotiate with New Zealand and why would China chose New Zealand as the first developed country to negotiate an FTA with? The reasons are largely strategic, but also partly political. New Zealand had shown considerable good faith towards China and had taken some risks on China s behalf. New Zealand was the first country to begin bilateral negotiations with China in the context of GATT/WTO accession and was the first to conclude these negotiations. New Zealand was the first OECD country to stop surrogate pricing on anti dumping investigations on Chinese goods and New Zealand was the first OECD member to formally recognise China as a market economy. These developments were not welcomed by all in the OECD. So it was not a total surprise that New Zealand became the first OECD member to begin FTA negotiations with China and the first to conclude such a negotiation. But China was not just seeking to reward New Zealand. China was rapidly on the way to becoming the world s largest export economy. It sees the benefit of free trade. It wanted to demonstrate its commitment to free trade in concrete form. It also wanted to show leadership. China also wants to secure supply of key resources and food. These resources are increasingly scarce and valuable. New Zealand is resource rich, water rich and will always be producing more food than it can consume domestically. This FTA with China increases the chances that New Zealand will want to supply China resources to keep the economic engine going, and food needed to keep the eastern seaboard satisfied. India and Korea are negotiating FTAs with New Zealand for precisely the same reasons. Can I end by some comments on the TPP, specifically about why the US is involved in this process. The reasons are again largely strategic. There is a credibility issue internationally about the US commitment to free trade and a huge issue domestically. The TPP is all about creating a new standard for FTAs. It is about creating new opportunities for US exporters, and therefore an opportunity to grow US jobs. It is also about creating a core of APEC members willing to meet this standard, and it is about being willing to allow others who meet that standard to join in. Long term, the goal is to have all of APEC part of the TPP, and there is no reason why membership could not extend beyond APEC. It is about adding some coherence to the noodle bowl. The US is showing by its participation in the TPP a commitment to be at the heart of this leadership process, and a commitment to help design the new standard for FTAs in the region. If the TPP partners get it right, I am hopeful that the agreement will enjoy substantial bi partisan support when it gets to be considered by the US legislature. Finally can I congratulate the Taiwan Government for its participation in the Economic Cooperation Framework Agreement negotiations with the mainland. ECFA is going to be of crucial long term importance for the Taiwan economy and it is going to have enormous implications for Taiwan s wider trade policy. I realise that there are those who fear the domestic impact of ECFA. Can I just say that there is a direct parallel with New Zealand s experience with Australia in the 1980s and New Zealand s more recent experience with China. During both negotiations there were many in New Zealand with similar fears. Surely we would be swamped by our much bigger neighbour? Well we were not. CER has been a huge success and the initial signs are that our FTA with China has been equally successful. I am sure that ECFA will be equally successful for Taiwan. 4

5 Lessons FTAs are as much, if not more about politics as they are about economics. Sound political relations are a necessary precursor to a FTA negotiation even beginning Why does Australia have an FTA with the US and not New Zealand? Why did New Zealand get to be the first OECD member with an FTA with China? Why are you negotiating ECFA with China? Was the EU really motivated by economic goals They take time and the initial agreement is not necessarily the end point. NZ Australia is still evolving after 25 years NZ now has three FTAs with Singapore and is negotiating its fourth The strategic value is often greater than the economic value NZ Singapore did not deliver either side huge gains but has delivered a continuing dividend NZ Hong Kong may do the same Taiwan would not get that much direct economic gain from FTAs with Singapore or New Zealand but what dynamic might such agreement release Comprehensiveness is possible (don t give into the protectionists) Do not fix political deadlines they can be used against you Don t leave important issues for later They are not a good vehicle for introducing discipline on subsidies Bipartisanship Key Openness very important and some mechanism needs to be found to consult regularly with key stakeholders 5