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TPP welcome, but no panacea

Published in Insights, The New Zealand Initiative’s newsletter, 30 November 2012

Negotiations on an extension of the Trans-Pacific Partnership (TPP), a free-trade agreement meant to liberalise economic relations across the Pacific, are to go into their fifteenth round next week. Proponents of the TPP hope it will improve conditions for foreign direct investment (FDI).

FDI is one of the faces of globalisation. Especially since the end of the Cold War, coinciding with the rise of Asia, total global FDI has been on the rise. According to UNCTAD, the United Nations Conference on Trade and Development, the total value of global FDI flows (in current prices) has risen from only US$13 billion in 1970 to US$1.52 trillion in 2011.

It is no exaggeration to speak of the rise of FDI as one of the dominant characteristics of the global economy of the past two generations, but it has been comparatively weak in New Zealand.

In New Zealand, investment inflows have trended down since 1993. In the mid-1990s, FDI as a share of GDP was typically between 5% and 6%. Since the early 2000s, and with the exception of 2007, it has hovered around the 2% mark.

This contrast is quite remarkable considering the global environment characterised by increased integration, trade and international investment. This global trend seems to have passed us by, and New Zealand has not benefitted as much as other countries from the increased mobility of capital.

It is also in this area that the TPP promises to have a discernible impact on New Zealand’s economic performance. By providing international investors with greater protection, so the proponents of the TPP argue, capital flows to New Zealand would be encouraged, and this could at least in part reverse the declining FDI trend.

There is a chance it might in fact contribute to such a trend-reversal. Having said that, it is certainly not a panacea.

First, the academic literature on bilateral investment treaties is not conclusive on whether such treaties have a large effect on investment decisions. Second, some of the trade growth between the partner countries may be at the expense of trade growth with other countries. Third, New Zealand’s own FDI regime, particularly its screening rules, are no longer best practice, as the Initiative argued in a research note earlier this year.

An extended TPP may have a positive effect on FDI – and New Zealand certainly needs to improve its FDI performance. But we should not expect the TPP to be a game-changer. Instead, we need to focus more on welcoming international investors, whether from TPP member countries or not.

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