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All not well with the prospect of a PTA with China

All is not well with the prospect of a PTA with China

12 July 2005

Available for Immediate Release

All is not well with the prospect of a Preferential (not Free) Trade Agreement with China. In spite of claims to the contrary, there are significant threats with any PTA with low cost countries (LCC) - these threats can be reduced by focused negotiation, but first they must be recognised as a threat worth addressing. The issues around "free" trade are not only to be tested by a balance of trade measure, but on the loss of capability due to transient trading conditions.

Putting aside any confidence in the so-called NZ$400 million annual gain for NZ exports to China - remember the recent Kyoto "miscalculation" - the microeconomic impact on effective, well run, but small Kiwi companies should not to be forgotten. These companies are the backbone of elaborate transformation activity in New Zealand, the source of much added value in the economy if you like - and LCC, particularly those pegged to the US$, have the ability to undermine this framework.

New Zealand has played the trade liberalisation card by unilaterally dropping tariffs in the hope that others would adopt such an agenda. Sadly this did not happen. In agriculture, the developed world has extensive and expensive interventions; tariffs and quotas; to protect the agricultural sector. And in the developing world, tariffs and quotas and less costly interventions support both agricultural and manufactured goods. Thus, talk of a PTA with the USA only has meaning in the agricultural area, whereas a PTA with China has implications for both manufacturing and agriculture.

It is not true to say that in the absence of tariffs New Zealand is open to the world, and so PTAs have no down side for New Zealand - the recent PTAs with Hong Kong failed on the basis of rules of origin. It is probable that business people in most of the counties that we have recently negotiated trade deals with, were not aware of our small nation, at the bottom of the earth, but once on the radar, due to early PTA talks, they found NZ an easy market to flood with goods, due to very low or no tariffs.

Meanwhile, NZ exporters are largely faced with lengthy phase-in periods, as far ahead as 2015 and 2020! In the meantime we are witnessing ballooning merchandise trade deficits with all recent PTA partners, and the trade deficit with the PRC just hit NZ$2 billion for the 12 months to May 2005. Is this a desirable outcome - we think not.

Nothing here is anti-trade; the issue is smart agreements that seek tariff-matching on the basis that New Zealand is no threat to PTA partners. Smart agreements that look to ensure non-tariff barriers are eliminated, that sanitary, phytosanitary and technical standards are equally enforced in both directions, effective dumping and dispute settlement procedures (ones that can be handled by small manufacturers in New Zealand) and finally, the elimination of intervention and support for offshore exporters, do not create a major lack of leveling in the playing field.

The yuan peg, tax rebates for Chinese exporters and others, create a competitive disadvantage for New Zealand manufacturers that will see competitive (all things being equal) companies threatened - this is not hand wringing - this is a fact.

It is this loss of effective manufacturing capability due to the changing nature of world trade that is the threat to New Zealand - and that is no reason to say that because the threat is inevitable, we must negotiate a PTA with anyone and everyone (the Chinese, Americans, Europeans and Australians seek to "protect" their economies, so why should we be any different ?).

This capability has developed over many years, and to see this lost on the alter of quick and dirty PTAs with LCC will, over time, cost New Zealand a place in the first world. Resisting this loss starts by taking off the rose-tinted glasses, which see only the upside in the current rash of trade agreements.


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