Political and Economic Considerations of Free Trade Agreements: New Zealand and AANZFTA:
What Exactly Are Free Trade Agreements (FTAs) and What Are Their Political and Economic Attractions and Liabilities From the New Zealand Government’s Point of View?

Free trade agreements (FTAs) are agreements negotiated between countries or groups of countries to improve market access for exporters and investors; reduce barriers obstructing trade; maintain current access to overseas markets; and to create rules resulting in a more secure trading partnership. The New Zealand (NZ) Government’s view of FTAs is consistent with the international literature on political and economic attractions and liabilities associated with such agreements. Aside from increased GDP, the NZ Government acknowledges that FTAs are economically attractive because they:provide new opportunities for NZ exporters through enlarged markets; increase welfare for NZ consumers through trade creation; increase efficiency and competitiveness for NZ producers; defend  market share in key export markets; and increase investment protection for NZ companies and individuals. FTAs are politically attractive to the NZ Government because they: ease political pressure from NZ exporters; build capacity; promote regional integration; kick-start stalled multilateral trade liberalisation; and raise NZ’s international status. FTAs produce economic liabilities such as reduced tariff revenue and adjustment costs, while they produce political liabilities such as domestic political opposition.

What Are Free Trade Agreements (FTAs)?

According to the NZ Government, an FTA is an agreement negotiated between countries, or groups of countries, to: improve overseas market access for exporters and investors; reduce barriers obstructing trade; maintain current access to overseas markets; and to create rules resulting in a more secure trading partnership.[1] Member countries agree to remove tariffs and non-tariff barriers on trade in goods within the FTA over a specific time period.[2] Each member maintains its own trade policiesand ‘unique’ trade barriersto non-members outside the FTA region.[3]Increasingly, FTAs include additional elements to those above.For example, the NZ Government aims for ‘high quality, comprehensive’ FTAs covering: trade in goods, services and investment; agreements on rules of origin (ROO); trade remedies; rules that aim to avoid the use of non-tariff barriers (such as technical barriers to trade [TBT], labelling requirements, sanitary and phytosanitary measures [SPS] and customs measures); labour and environmental standards; provisions for ongoing member country cooperation; and dispute settlement mechanisms.[4]

The ASEAN-Australia-New Zealand Free Trade Area (AANZFTA)

The agreement establishing the AANZFTA (hereafter AANZFTA) is a valuable case study to provide evidence of the NZ Government’s view on FTAs.[5] The agreement entered into force on 1^st January 2010 and is described as highly encouraging.[6]AANZFTA was estimated to bring an additional US$48.1 billion GDP to the region in the 2000-2020 period.[7] Of this, US$25.6 billion would go to ASEAN, US$19.1 to Australia, and US$3.4 billion to New Zealand. Beyond increased GDP, AANZFTA will be used to illustrate below the NZ Government’s view of FTAs.

Table 1: NZ exports to ASEAN and NZ imports from ASEAN.

Source: Statistics New Zealand[8] 

Economic Attractions of FTAS From The NZ Government’s Point of View

‘Offensive Commercial’: New Opportunities For NZ Exporters Due to Enlarged Market

The desire for new and/or expanded market access is a ‘powerful’ attraction for wanting to negotiate an FTA.[9] A primary economic attraction of AANZFTA is the significantly enlarged market for the 12 member countries involved.[10] The ASEAN countries represent a market of at least 566 million people worth US$1.4 trillion in global trade and are an increasingly important destination for NZ service providers and outward investment.[11]If current growth rates continue, the potential growth of the ASEAN market is ‘enormous’ over time.[12]Market enlargement also means that NZ exporters can move beyond the constraints of the domestic market, enjoying, for example, economies of scale.[13] In services, the AANZFTA creates obligations of ‘market access’ and ‘national treatment’ in sectors that are included in each country’s services schedule, meaning that NZ service providers cab operate in ASEAN markets to the same extent as domestic providers.[14]The NZ Government acknowledges that AANZFTA can provide commitments that would meet NZ’s ‘offensive commercial’ needs in a ‘growing and important market’.[15]

Trade Creation Leading To Increased Welfare For NZ Consumers

AANZFTA encourages trade in goods and services by removing barriers, providing greater certainty and transparency, and reducing transaction costs for NZ companies wanting to do business in ASEAN countries.[16] By 2020, 99 percent of existing NZ trade in goods with Indonesia, Malaysia, the Philippines, and Vietnam, will be duty free.[17] Upon full implementation in 2025, NZ will save approximately $50 million per annum on tariff duties.[18] Removing barriers to trade allows members’ products easier access to one another’s markets.[19]This results in ‘trade creation’, which occurs when an FTA member substitutes domestic production of a good with imports of a similar good from another FTA member.  This is because the formation of the FTA has made it cheaper to import rather than produce domestically.[20] Trade creation increases the welfare of consumers who pay lower prices for an increased volume of both imported goods and similar domestic goods, while having a greater range to choose from.[21]

 Table 2: Tariff removal on selected NZ dairy goods in key ASEAN markets.

*tariffs on other dairy exports to Indonesia, the Philippines and Viet Nam will be eliminated ate various stages between 2010 and 2020 (at the latest)

Source:  Ministry of Foreign Affairs and Trade.[22] 

Table 3: Tariff removal on selected NZ horticultural goods in key ASEAN markets.

* tariff reduced rather than removed

Source: Ministry of Foreign Affairs and Trade.[23]

Increased Efficiency and Competitiveness For NZ Producers

Beyond trade creation, the removal of trade barriers creates greater competition, as companies are pressured into searching and adopting new research and technology, cost-cutting methods, and new practices that improve productivity.[24] A more efficient pattern of production emerges, which reflects the comparative and competitive advantages of each FTA member state, which in turn reflect the factor endowments (land, labour, capital, and enterprise/entrepreneurship) of each member.[25] This process is known as ‘industry relocation’. The NZ Government states that an important attraction of AANZFTA was that it would fulfil a desire to improve business competitiveness.[26]

‘Defensive Commercial’: Defence of Market Share In Key NZ Export Markets

‘Trade diversion’may occur when efficient producers are shut-out of free trade blocs due to non-membership; thus losing market share to inefficient producers who enjoy preferential market access as members.[27]Even if NZ’s products are higher quality and lower cost, these may become uncompetitive due to price distortions brought about by trade barriers.[28]The fear of trade diversion can produce ‘strong incentives’ for governments to negotiate their own FTAs.[29] FTAs can be a defensive reaction to the ‘first-mover advantage’ enjoyed by producers of goods within a preferential trading bloc.[30]

The NZ Government views FTAs as a means to ensure continued competitiveness of NZ exporters in important markets.[31] As international competitors of NZ companies achieve preferential market access through FTAs with countries where NZ has major export markets, NZ must do likewise, or its exporters will become uncompetitive, and will lose market share. The Government uses FTAs to maintain a ‘level playing field’ for NZ exporters.[32] Considering that ASEAN has already concluded negotiations with a number of NZ’s competitors (including Korea, Japan and China), AANZFTA will allow NZ companies to remain competitive in the important ASEAN market.[33] Indeed, a key motivation for beginning negotiations was due to the view that establishing AANZFTA was‘not only feasible but also advisable if both ASEAN and CER are at least to keep pace with the rapidly changing world of today’.[34]

Increased Investment Protection For NZ Companies and Individuals

AANZAFTA provides improved security for NZ investors and their investments in the markets of all 10 ASEAN countries.[35] NZ investments in ASEANcountries will enjoy enhanced transparency; will be afforded the same treatment by ASEAN governments as investments by their own nationals due to ‘protection disciplines’ such as national treatment.[36]AANZFTA protects against arbitrary expropriation; compensates for losses due to armed conflict, civil strife, or state of emergency; lowers transaction costs; and give investments fair and equitable treatment, and full protection in accordance with international law.[37]

Considering investment in the Asia-Pacific has been both high risk, and constrained by protectionist regulations, recent institutional improvements contained in FTAs have promoted an expansion of foreign investment in the region, by ‘improving the environment for it’.[38]Investment inflows into ASEAN were projected to increase by US$30 billion in 2000-2010, while CER could expect an additional US$7.7 billion.[39]Increased investment inflows are attractive to NZ because they improve access to new technology, input sources, financial knowledge, production and management techniques, and global marketing networks.[40]

Political Attractions of FTAs From The NZ Government’s Point of View

Ease Political Pressure From NZ Exporters

FTAs are attractive to governments so as to ease domestic political pressure by domestic exporters. As international flows of trade and investment increase with important trading partners, the private sector will lobby government to create supranational institutions that will: 1) provide rules to reduce uncertainty; 2) reduce transaction costs; and 3) enable the enjoyment of the benefits of larger markets.[41] Although reluctant to give up their sovereignty, FTAs allow governments to manage issues created by expanding economic transactions.[42] The NZ Government says an attraction of AANZFTA was to establish ‘sound frameworks’ that would increase certainty, transparency, and reduce transaction costs for NZ companies looking to do business in ASEAN.[43]

Capacity Building

An important attraction of FTAs for governments is the desire to develop both negotiation techniques, and highly skilled bureaucrats so as to avoid disadvantageous commitments in future FTA negotiations, especially with larger economic partners.[44] The NZ Government, like others around the world, negotiate with highly skilled preferential traders to acquire ‘on-the-negotiation’ training to build their FTA ‘know-how’.[45] NZ Government officials and political leaders gain valuable information and experience negotiating FTAs.[46]

Promotion of Regional Integration

The NZ Government gives two ‘strategic’ political attractions of FTAs. Firstly, the Government says that AANZFTA is important to NZ’s longer term interests of engagement with East Asia, to encourage ‘open and outward looking’ regional integration.[47] By strengthening economic ties with ASEAN economies, AANZFTA will contribute to enhanced East Asian integration, which is ‘central to New Zealand’s future economic prosperity and security’.[48]

FTAs as Pieces In a Larger Trade Jigsaw: Kick-Starting Wider Trade Liberalisation Internationally

Secondly, Hoadley illustrates that FTAs can be ‘an element in a larger trade strategy: to encourage trade liberalisation globally.[49] While the NZ Government’s overall strategy is to liberalise trade multilaterally, through negotiation at the World Trade Organisation (WTO), it recognises that this would be ‘protracted’.[50] Because of this, NZ officials find bilateral and regional liberalisation attractive in the shorter term.[51] Given the stalled multilateral trade liberalisation project, ‘NZ is not content to sit and wait for events to unfold and hope that all goes well… we need an insurance policy’.[52] For example, the benefits of the NZ-Singapore FTA would be ‘strategic’.[53] According to Tim Groser, then Principal Advisor Economic at the Ministry of Foreign Affairs and Trade (MFAT), prior to negotiations over the NZ-Singapore CEP (Closer Economic Partnership):

New Zealand would like Singapore to consider the possibility of a free trade agreement (FTA) between our two economies. The case for such a FTA does not lie in traditional trade policy: there are likely to be few discernible trade benefits….the case for such a FTA is almost wholly strategic.[54]

The NZ Government believes that bilateral and regional FTAs provide alternatives to multilateral trade liberalisation: they are ‘building blocks’ for more extensive agreements.[55]

Diplomatic Attractions

FTAs are attractive to the NZ Government because they raise NZ’s international status. Officials and political leaders sometimes join a ‘perceived progressive international trend’ towards trade liberalisation in order to increase their states diplomatic status: many states take part in FTA negotiations simply to ‘be noticed’ internationally.[56] Once implemented, NZ and others involved in AANZFTA would display a ‘strong commitment to policy reform’, such as in trade liberalisation and economic stability, thus enhancing their credibility as a trading partner.[57] NZ’s quality FTAs bring ‘international credit’ to the NZ Government and its negotiation partners.[58]

Economic Liabilities of FTAs From The NZ Government’s Point of View:

Decline in Tariff Revenues

Reduced tariff barriers to imports from partner countries, following the implementation of an FTA, may result in lower government revenue for member countries.[59] In NZ’s case however, tariffs are already zero, or close to zero, and so the loss of tariff revenue because of AANZFTA will be largely ‘inconsequential’.[60] In 2005, the revenue collected by NZ on imports from ASEAN countries was 26.3 million.[61] Even with a small decline in tariff revenue following an FTA, there is not a ‘real economic loss’, because NZ consumers now pay a lower price for imported goods.[62]

Adjustment Costs

Short-term adjustment costs, such as unemployment, as inefficient companies reallocate resources or fail, result from the liberalised economic environment following the implementation of FTAs.[63] Although short-term adjustment costs are small relative to the long-term benefits of trade liberalisation, adjustment costs must be addressed so as to ‘ease the burden on the affected sectors’, and also to ensure the realisation of the long-term benefits.[64] People ‘displaced’ during ‘market opening’ will require government adjustment assistance, such as finding employment in growth areas of the economy, or skills training.[65] The NZ Government notes that the removal of tariffs on imported products can result in negative adjustment effects for import-competing sectors, especially.[66] The Government says that MFAT will work closely with companies to ensure that adequate time is given for adjustment if tariff removal occurs in an area of sensitivity.[67] Under AANZFTA, the NZ Government has mitigated adjustment costs to NZ producers by delaying tariff elimination on ‘acutely sensitive’ imports, and implementing conditional protection measures such as surge safeguards.[68]

Political Liabilities of FTAs From The NZ Government’s Point of View:

Domestic Political Opposition:

The NZ Government has encountered resistance to FTAs in the past.[69] In order to overcome resistance from the Green Party, unions, and import-competing sectors, the Government has had to exercise strong leadership domestically to legitimise and ratify new FTA treaties.[70] By releasing briefing papers, National Interest Analysis, cost/benefits assessment to the public; consulting with key stakeholders; submitting the text in question to Parliament; and even renaming the agreement to sound less threatening, the NZ Government has shown that it can reduce opposition and legitimise FTAs domestically.[71]

To summarise, FTAs are agreements negotiated between countries or groups of countries to improve market access for exporters and investors; reduce barriers obstructing trade; maintain current access to overseas markets; and to create rules resulting in a more secure trading partnership. The agreement establishing the AANZFTA was used as a valuable case study to shed light on the NZ Government’s view of FTAs. This essay has illustrated that the NZ Government acknowledges FTAs as economically attractive because they provide new opportunities for NZ exporters through enlarged markets; increase welfare for NZ consumers through trade creation; increase efficiency and competitiveness for NZ producers; defend market share in key export markets; and they increase investment protection for NZ companies and individuals. FTAs are politically attractive to the NZ Government because they ease political pressure from NZ exporters; build negotiation and diplomatic capacity; promote regional integration; kick-start stalled multilateral trade liberalisation; and raise NZ’s international status. The NZ Government acknowledges that FTAs produce economic liabilities such as reduced tariff revenue and adjustment costs, while they produce political liabilities such as domestic political opposition. However, these liabilities can be overcome or mitigated. In the case of reduced tariff revenue, NZ’s tariffs are already zero or close to zero so revenue is already low. Moreover, any reduction in revenue is offset by consumers paying a lower price for imported goods.In the case of adjustment costs such as unemployment, these are short-term vis-à-vis the long term benefits; domestic social policy can be used to assist those unemployed; and provisions of FTAs themselves can help those companies threatened by adjustment costs through delayed tariff removal in sensitive areas for example. Finally, domestic political opposition can be overcome through transparency and through consultation with key stakeholders. Such efforts allow for legitimisation and ratification of the FTA in question. 

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