Published in The National Business Review (Auckland), 1 May 2015

Since the free trade agreement with China came into effect in 2008, exports to China have soared. The trading relationship with China has been helping the New Zealand economy navigate through the past years of global uncertainty.

For all the controversy before its introduction, few people would still argue that trade liberalisation had not made New Zealand better off. The benefits of greater exchange are palpable.

Economists are not the least surprised by this development. Since the days of Adam Smith and David Ricardo, the case for free trade has been established in economics.

However, just removing tariff barriers to trade does not ensure trade will actually happen. Other obstacles to cross-border dealings are not dealt with by most free trade agreements. One is the uncertainty for businesses about how to deal with disputes between them and their overseas partners.

The problems that can arise from cross-border disputes are easy to understand. For a start, you may have to deal with a country whose language is not English. Unless the trading partner’s country stands in the common law tradition, legal terminology and methods could diverge from common understanding.

With no previous knowledge of a country’s legal system, businesses may not even know how to begin legal proceedings. They would also be unclear on how to enforce judgments. In some countries, legal transparency, judicial neutrality or uncertain resolution costs can be deterrents.

In summary, there are plenty of pitfalls for any business considering to trade internationally. Large companies may find it easier to deal with these problems because of scale economies. If your trade deals are worth millions of dollars, of course you would find it worthwhile jumping through a few legal hoops.

Downsides outweigh benefits

Meanwhile, for small- and medium-sized businesses the potential downsides of trade could outweigh the benefits. International surveys regularly show the potential of international litigation is one of the main deterrents for companies considering to trade.

Both the European Union and the World Bank have come to this conclusion. There is every reason to believe that New Zealand businesses have the same reservations about trade as their overseas counterparts.

Of course, companies trading internationally can take precautions. When it comes to contracting with an international partner, they could agree at the outset what to do if conflicts arise. For example, they might specify in which of the two jurisdictions any disputes must be settled. They could also agree to submit any future disputes to arbitration.

Yet in practice many companies fail to take such precautions. Instead, they later find themselves as a party in a cross-border litigation. The current default position for companies is to rely on two legal systems in question for conflict resolution.

Arbitration alternative

As Petra Butler, an associate professor at Victoria University of Wellington, and Campbell Herbert, a solicitor at Chapman Tripp, argue in a recent article in The New Zealand Universities Law Review, there is a much more appealing alternative to this state of affairs.

Noting that arbitration already serves as a preferred dispute resolution mechanism for those engaged in international trade, they propose to make it the default option for the resolution of cross-border conflicts. The vehicle with which they are suggesting to achieve this goal is the Bilateral Arbitration Treaty, or BAT.

The BAT is the brainchild of Gary Born, who is regarded as the world’s pre-eminent authority on international commercial arbitration and litigation. Last year, he released a template of such a treaty that any two interested countries could take off the shelf and sign.

To be clear, a BAT would not replace any existing free trade agreements. It would supplement them and amplify their potential.

This is how it would work in practice. New Zealand and another country sign a BAT, which provides a neutral dispute resolution mechanism for international commercial disputes. The idea is that such mandated arbitration promotes trade. It would do so by reducing one of the most important non-tariff barriers: the costs and risks associated with conventional dispute resolution.

The BAT’s effect would remove disputes from the legal systems of both countries. Instead, such cases would be referred to arbitrators. These arbitrators would be chosen for their neutrality, objectivity and expertise for the parties’ dispute by a highly-regarded independent arbitral institution.

Prof Butler and Mr Herbert believe such arbitration would not only speed up the time it takes to deal with disputes, it would also make resolving them less costly. One cost-saving would be the possibility to use just one counsel for all questions relating to the dispute instead of briefing many law firms in different jurisdictions and at different stages.

A large advantage compared to conventional litigation would be in relation to enforcement of titles. As anyone trading with China knows, it is one thing to have a claim against a Chinese company and a different issue to have that claim enforced in China.

There are enough political grounds on which Chinese courts can stop enforcement. Security issues as well as social and public interests are among the most common ways to thwart enforcement or even recognition of foreign judgements.

With a BAT in place, these issues could become easier. China is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). As such, it would be straightforward to enforce awards under the BAT.

To be clear, a BAT would not only have advantages in dealing with different legal traditions. Even for trade with a common law country like the US, a BAT could make life easier.

Dealing with the US is complicated because of its federal structure. Rules and proceedings vary from state to state. This can be frustrating for New Zealand companies. A BAT could solve this problem. It would offer a “one stop shop” for resolutions between New Zealand and any US companies no matter where they are based.

There is no profession that believes more strongly in the benefits of free trade than economists. But it takes more than just economic convictions to make trade happen. That needs an institutional framework that helps with the practicalities of trade across borders – particularly for when things go wrong. And it takes lawyers to provide us with the tools to make trade happen.

For many companies in New Zealand, the BAT could be just the tool they need to fill free trade agreements with life.

Dr Oliver Hartwich is the executive director of The New Zealand Initiative. The Initiative will be hosting public events with Gary Born in Auckland and Wellington (May 6 and 8). Register at http://nzinitiative.org.nz/Events.html