2018 04 – News from New Zealand

A Letter From Our New Zealand Correspondent

Feargus O’Raghallaigh

 Milk and politics

Since the mid-1980s New Zealand politics, cross-party, has had a consuming obsession with ‘free trade’. In the political spectrum two minorities, the Greens and New Zealand First have dared to raise questions. There is anti-American and anti-Multi-National Corporation (MNC) noise also on the Labour left but it amounts to nothing. When push came to shove and power beckoned after last year’s general election there was arguably the most bare-faced turnaround in global political history with the sudden discovery that the Trans Pacific Partnership (TPP) that Labour opposed in opposition wasn’t the same TPP as it was once Trump pulled the US from the deal and in New Zealand Labour was in government. The TPP title was changed in favour of the Comprehensive and Progressive Trans-Pacific Partnership (or CPTPP). The comedian and satirist John Clarke were he alive would have made a meal of it.

Global ‘free trade’ is an obsession here. Its absence is seen as a denial almost of New Zealand’s birthright and entitlement. Kiwi paddocks could feed the world, cheaper than anyone else can. The udder economy, New Zealand beef and lamb, venison and vines could creak the dining tables of households throughout the world – affordably and therefore to consumers’ benefit and to the benefit also of Kiwis.

Ricardianism Lives! In New Zealand anyway.

The China trade agreement negotiated by Labour’s Helen Clark in her final year in office, 2008, is for New Zealand mainstream politics living proof of the benefit of letting comparative advantage rule the world. Being Beijing’s food basket has worked wonders for the New Zealand economy most Kiwis would say. However, it has taken an enormous toll. There is the highly visible impact of dairy effluent on the environment. And then there’s the issue of water: the drain on lakes, the rivers and the aquafers to feed giant intensive irrigation systems that now underpin intensive pasture. ‘The price of progress’ is the rejoinder to the enviro-moaners.

There is another question: whether the China agreement is an example of comparative advantage and Ricardian theory – or whether it represents something else.

 

Trade – export-led growth

The China deal was slow to yield gains. And then it did, relatively suddenly. This, one suspects, was very much on the push of the National-led governments of John Key and Bill English (2008 – 2017), and the adoption by these governments of export-led growth policy.

National’s policy had three elements. First up, the target was to raise the export component of Gross Domestic Product (GDP) over time from 30 to 40 per cent. Second, and central to this ambition was the target of doubling commodity exports (agriculture, forestry and fisheries) in real terms between 2012 and 2025. And third, the scope of ‘free trade’ would be expanded through negotiating China-type market access treaties with a range of countries.

At the administrative/institutional level government created two super-ministries, the Ministry for Primary Industries (MPI) and the Ministry for Business Innovation and Employment (MBIE). They were to be business-driven. MPI absorbed a range of regulatory agencies and functions in areas such as animal disease control, biosecurity, and fisheries quota regulation. Similarly at the new MBIE it was to all about the needs of business including especially in respect of the labour market (where the emphasis was to be on ‘flexibility’).

The goal was again, growth. To this end every regulatory, veterinary and environmental fetter or rule, every regulatory requirement on business generally (including in respect of workers’ pay and conditions) that might remotely have been said to hold back cheap food production was to be made subject to growth objectives and their realisation.

Trade was to be all, and all was to be trade.

Domestic output of primary products (the supply side) would swell while demand (market access) would also be boosted by new, China-type arrangements with ever more countries and blocs. This latter aspect was to be the job of the Ministry for Foreign Affairs and Trade (MFAT). Critical on this front, almost above all else, was securing enhanced access to the US market for NZ food and agriculture. Yes, getting a deal with the EU and securing deals with the Arab world (critically with the Saudis) and with Russia were important but as nothing to opening the US gates. That was the whole point of the TPP, a New Zealand invention or initiative.

New Zealand thinking on TPP was simple. It was first proposed as a small trade arrangement entering into effect in 2006 between Brunei, Chile, New Zealand and Singapore, known collectively as P4. Crucially, the NZ-led agreement allowed new members to join. Eventually, on the NZ view, the US could be enticed into the arrangement – especially as its pivot to Asia took hold coincident with and in response to the rise of China as a hegemonic Pacific power.

A geopolitical setting or moment then was used by New Zealand to achieve a specific ‘free trade’ purpose, lower tariff market access for its food producers to the US.

The pursuit of easier US market access has not worked. For one thing, the pivot to Asia simply did not happen. America remains mired in the Near East on a number of fronts including Afghanistan and Syria not to mention the continuing bogs of Iraq and Iran (and don’t mention Israel). There is no end in sight to any of this.

Then along came the US presidential election of 2016. It was fought to a significant extent in a torrid protectionist atmosphere – to such an extent that the key US advocate for the pivot and TPP Hillary Clinton, had to join the protectionist ranks abandoning her precious pivot and becoming a turncoat on TPP. Trump still won – and immediately junked TPP.

Meanwhile the putative Arabian deals have sunk in a sandstorm of bribery allegations in relation to the Saudis and disappeared. The EU talks are endless – and will go nowhere. Brussels and national EU governments will not sell out their farmers, which is essentially what New Zealand is proposing they do. Oh and as of now, don’t mention Russia.

On the supply side, two points can be made. First, the export/GDP ratio target has gone for its tea, sunk by sustained domestic growth driven by a construction boom (including the Christchurch rebuild), a property bubble and record-level inward migration. And second, however much the China trade has boomed it is also a hugely volatile trade – it is after all entirely based on primary products (selling at world prices and subject to market exchange rates), just about the riskiest trade policy a country could pursue. As has proven to be the case for New Zealand; talk to any dairy farmer here about their profits.

 

China realities

As to China specifically, there’s been a mood swing in official America in respect of the People’s Republic of China (PRC). It coincides with the end of the Obama era – but that is probably coincidence. It appears that a swathe of the US foreign policy establishment now realises that the PRC has beaten them at every turn since ‘Nixon in China’ and that today they have no answer.

In the current issue of Foreign Affairs two now-retired policy insiders, Kurt M Campell and Ely Ratner have a piece, The China Reckoning – How Beijing Defied American Expectations. They write:

“Nearly half a century since Nixon’s first steps toward rapprochement, the record is increasingly clear that Washington once again put too much faith in its power to shape China’s trajectory. All sides of the policy debate erred: free traders and financiers who foresaw inevitable and increasing openness in China, integrationists who argued that Beijing’s ambitions would be tamed by greater interaction with the international community, and hawks who believed that China’s power would be abated by perpetual American primacy”.

And, they write,

“Neither carrots nor sticks have swayed China as predicted. Diplomatic and commercial engagement have not brought political and economic openness. … the liberal international order has failed to lure or bind China as powerfully as expected. China has instead pursued its own course, belying a range of American expectations in the process”.

In a second piece, ‘Life in China’s Asia – What Regional Hegemony Would Look Like’ by Jennifer Lind, the author writes,

“For now, the United States remains the dominant power in East Asia, but China is quickly closing the gap. Although an economic crisis or domestic political turmoil could derail China’s rise, if current trends continue, China will before long supplant the United States as the region’s economic, military, and political hegemon”.

Asia is now shared by two hegemons, the US and China. Soon there will on current trends likely be one. However Lind doesn’t see it as inevitable. America can stay in there but not on its own. Japan above all Asian allies must become serious about own-defence and critically power projection, in short remilitarising. Other allies including Australia and New Zealand will on the Lind view also have to raise their security, defence-spending and military game. Further, the two must take seriously their old role in the Pacific Islands, now that China has become almost unnoticed a very big player in the foreign aid and development stakes, its budgets favouring big-ticket infrastructure projects.

From the Kiwi perspective the 2008 China deal may have looked like a model of Ricardianism. It is still seen in this light today. However it was never such for the Chinese – any more than they saw their Australian ore and coal imports in such lights. Feeding China for profit is now, suddenly, diplomatically and politically problematic. New Zealand is waking up to the reality that trade, in the end, remains not about anything much more than good old mercantilism – and geopolitical ambitions, rivalries and projects. Further, mercantilism and geopolitics are two sides of the same coin.

Any other takeaways? One at least for British readers: the British government in its pursuit of its hard Brexit is discovering much the same as New Zealand. Fox, Boris and mates are talking rubbish and life in a nineteenth-century imperialist-ideological tub will be distinctly uncomfortable as becomes clearer by the day.

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