Bilateral trade deals create winners and losers

Published in The National Business Review (Auckland), 19 July 2013 (PDF)

After decades of shadow boxing and talking about it, the prospect of a trans-Atlantic free trade bloc is a big step closer.

On July 8, formal talks began for a US-EU free trade zone, the largest free-trade agreement ever negotiated. President Barack Obama has added his full support to this Transatlantic Trade and Investment Partnership (TTIP).

Ever the optimist, he wants the agreement to be concluded before he leaves office in January 2017.

While President Obama’s timeline might not be quite realistic (free-trade treaties are notoriously complicated – and even more so when the French are involved), the development of this deal should be closely watched in New Zealand.

Of course, the usual professional campaigners are against TTIP – and they are against it for the same reasons that they object to the Trans-Pacific Partnership, the World Bank, the International Monetary Fund, the G8 or any other organisation that appears to be promoting globalisation.

In essence, their objections are deeply ideological, anti-capitalist reflex.

In their view, world trade is just a cunning ploy to exploit workers, deceive consumers, pollute the environment or even, heaven forbid, run profitable companies.

“The free-trade agreement between the US and the EU is just a Trojan horse for corporate interests,” explains a spokeswoman of Campact, a self-declared “campaign network.”

Apart from such ideological opposition, which often smacks of conspiracy theory, there are good reasons to be concerned about TTIP: The commitment the ideals of free trade is dubious on both sides of the Atlantic; a potential US-EU agreement may just divert trade without creating new opportunities; and above all, it could be an obstacle toward a truly global free trade order.

The basic idea of a bilateral free-trade deal is simple: it will deliver billions of euros and US dollars of savings to countries within the Europe and the US, help to create many millions of jobs and realise the well-known gains that accrue from free trade.

However, given both the European and American historical ambivalence toward free trade and open markets (particularly in areas important to New Zealand such as agriculture) a question hangs in the air: is this about genuine free trade, or is it in fact creating a mega-protectionist bloc?

If it is the latter, it should be something that concerns nations committed to free trade but outside the deal who suddenly find market access blocked or rendered less competitive by a very large, subsidised and protectionist trade bloc.

So what might the implications of the TTIP be for New Zealand? Who will benefit? A new report seeking to quantify the costs and benefits of the TTIP has been released by the Global Economic Dynamics programme, a project of the German- based Bertelsmann Foundation: Transatlantic Trade and Investment Partnership (TTIP): Who benefits a free trade deal? It attempts to quantify which countries stand to benefit, which countries stand to lose, and to what extent they will do.

The positive figures first: The US, the UK and the rest of Europe are set to benefit. In fact, the report argues the US will benefit to the tune of more than a million jobs and a 13.4% increase in long-term GDP per capita growth. The UK will benefit similarly – it is estimated the deal will create 400,000 jobs and 9.7% GDP long-term growth. The British could certainly do with a boost to their economy.

To the negative and more pertinent figures: New Zealand, Australia, Canada and virtually everyone else not included in this new trade bloc will lose out: both in GDP and jobs.

The estimate given for New Zealand is a loss of 3.8% of longterm GDP and 7000 jobs. Australia would lose 52,000 jobs and 7.4% of GDP? The biggest loser is Canada, which enjoys a relatively free relationship with the US through the North American Free Bade Agreement (Nafta). It stands to lose up to 100,000 jobs and faces a hefty 9.5% downward revision in its per capita income.

Admittedly these are modelled figures and they reflect the assumptions on which they are based – this high-end projection assumes a robust he-trade framework within and between both Europe and the US – more than the mere removal of tariff barriers. And it highlights the extent to which any potential deal will negatively affect countries not involved.

It’s not that the conspiracy theorists are right and that free trade is bad but that it is simply a bilateral trade treaty, rather than a free-trade agreement open to all countries.

The proliferation of these smaller scale bilateral trade deals is understandable given the breakdown of the Doha negotiation round. New Zealand is itself engaged in one such negotiation, the ‘Trans-Pacific Partnership (TPP), because of the international trade stagnation. It is premised on the notion that, if there is a free trade deal to be made, it is usually better not to be left out. But that does not deter from the fact that bilateral agreements are only a secondbest solution compared to global free trade.

Bilateral deals such as TPP and TTIP complicate the world trade situation and create concrete winners and losers. Whereas free trade allows different hm to compete across national boundaries and allows countries with different absolute and comparative advantages to benefit, competing protectionist blocks trade on political and economic clout. They create benefits of free trade within a greatly expanded market but at the expense of players who are not at the table.

New Zealand needs to be acutely aware of these developments. Although we are fortunate that many of our markets are in emerging economies, a new US-EU agreement does risk becoming the 21st century equivalent of the UK’s entry into the European Economic Community albeit on a smaller scale. It would also likely retard any steps toward a revival of the WTO process.

Fortunately, the TTIP is highly unlikely to be concluded by 2017. Indeed, even 2027 would be a stretch. But the Bertelsmann Foundation’s report leaves us in little doubt there will be a downside for New Zealand, and that we should, at the very least, be prepared for it.

In the meantime, we should continue regarding bilateral “free trade” agreements with some healthy suspicion.

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