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Keith Rankin: An American-Pacific Commonwealth?

An American-Pacific Commonwealth?

Keith Rankin, 12 July 2001

Former Canadian Prime Minister Brian Mulroney wants New Zealand to join the North American Free Trade Agreement (Nafta). The reality is that we are in many respects already an economic province of North America. That need not be a bad thing. We need to reflect on what being an economic province really means, and on how to ensure we get the full value of the relationship.

Unfortunately Mulroney's trip (which has coincided with that of Canadian anti-globalisation activist Naomi Klein, author of No Logo) has done little more (in the media at least) than arouse the intransigent protagonists of the free trade versus anti-globalisation stand-off.

Free trade can be both good and bad; the best policy mix depends on prevailing national and international contexts. Free trade in some circumstances can be a "first-best" policy. In other circumstances it is a distant "third-best".

There are a lot of paradoxes associated with trade policy. World trade expanded most during two phases of protectionism: 1870s to 1913, and 1940s to 1970s. Further, in each case the countries whose trade expanded the most were the most protectionist (USA and Germany in the earlier period; Japan, Korea and Western Europe in the post-war period). Further, the most politically persuasive arguments for free trade in the last two centuries have always been nationalist rather than internationalist. The United States today (as it always has) argues on the basis of perceived American interest, not global well-being.

Likewise 'globalisation' contains a mixture of positive and negative. The pro's emphasise the former; the anti's emphasise the latter. They talk past each other. Mulroney, in a radio interview, said that the anti-globalisation protestors (who mobilised through the latest internet and cellphone technology) are luddites. He waxes lyrical about Nafta when the gains to Canada and Mexico, which mainly sprang from the huge growth in the 1990s of the US market, would have occurred anyway.

The global anti-globalisation protesters share Adam Smith's fear of business interests conspiring to enserf national sovereignties. They see multinational corporations exerting a hegemony over the world's resources, leaving the increasingly excluded majority of the world's population to fight each other for the scraps by prostituting their labour.

All these arguments contain important truths. We need to synthesise these truths, creating new ways of interpreting what is going on (and not just arguing about what ought to be happening), and using these insights to guide foreign policy.

The classical theory of free trade accepts that economies (economic nations) do not necessarily coincide with political nations. The key classical assumption was that (economic) nations were characterised by perfect freedom of movement of goods, of capital, and of labour. The classical economists advocated perfect freedom of goods between nations, while assuming that capital and labour could only be employed in their home nations.

Thus free trade is a state of affairs in which goods and only goods (and services) are freely exchanged between nations. The benefit to all nations is that they use their resources more efficiently by each specialising in the production of products that their combinations of resources produces best.

Globalisation is when goods, services, capital and labour all flow without impediment. The globalised world is a single (economic) nation. International trade ceases to exist. All trade is domestic. What we might still call international trade is really inter-provincial trade.

The assumptions of classical trade theory can be taken as definitions of economic nationhood. A nation is defined not through political sovereignty, but through the mobility of capital and labour. So the world's economic nations are the existing zones within which capital and labour most readily flow.

I believe that we can divide the world into six economic nations, each containing between half a billion and 11/2 billion people. And I believe that the gains of free trade and other globalising influences can be gained from a world divided into six economies, while the negatives can be averted by formalising the subdivision of the world economy into no fewer than six economic nations.

New Zealand, I would argue, belongs to an economic nation that I would call America-Pacific. The boundaries of America-Pacific are close to those which Brian Mulroney envisions for his beloved Nafta. (The other five economic nations that I see might be called: East Asia, China, India, West Asia - Sahara, and Eurafrica.)

I will use the term commonwealth to mean a properly defined 'economic nation'. It's usage that is consistent with that of, for example, the "Commonwealth of Australia" which formed, 100 years ago, as an economy forged from six nations. It is not consistent with the [British] "Commonwealth" that is really an alumnus society for the former British Empire, and whose members have no unifying economic ties.

The inchoate America-Pacific commonwealth includes Australia, Polynesia (except French Polynesia), Melanesia, Micronesia and possibly the Philippines. There are a few anomalies, arising from historical colonisation. Thus French Polynesia, already part of the European Union, is (economically) in what I have called Eurafrica. (Indeed it is on account of past European colonisation that sub-Saharan Africa is a part of the same economic nation as Europe.) And Israel, economically, belongs with America.

Capital and labour do flow between the economic nations that I have defined. But I suspect that the net flows are quite small. The predominant channels through which capital and labour flow are, I would argue, within the nations I have identified. Interestingly, China and India are comparatively self-sufficient in capital and (more arguably) labour. Further, I would argue that if capital and labour flows were confined to these six nations (something I am not advocating), then the loss of economic efficiency would not be very large.

So, what does it mean for New Zealand to be a part of an American-Pacific commonwealth?

It means that New Zealand is a province of America-Pacific. It supplies labour to the economic nation as a whole. In particular, labour is drawn from the periphery to the centre (essentially the USA). As a result, capital accumulates in the centre, and is dispersed to the periphery, to the economic provinces. So the net pattern of interest and dividend flows is from the periphery to the centre of the economic nation.

We can see similar relationships more clearly, by simply observing the way places like Southland and Hawkes Bay interact economically with, in particular, Auckland.

Few people would argue that the freedom of goods, capital or labour between Invercargill and Auckland should be restricted in any way. Likewise, it makes no more sense to restrict the freedom of movement of goods, capital and labour within the American-Pacific region.

What does make sense instead, is to consider why Southlanders are not impoverished, despite their loss of people and the net outflow of interest and profits. The reason is that taxation and public goods' provision operate at the national level. Invercargill's hospital and schools do not depend on revenue raised within Southland. The investment in human capital that takes place in Invercargill's schools is funded from throughout the New Zealand economy, especially from Auckland and Wellington. So, the fact that many Invercargill-born New Zealanders are employed productively in Auckland is not an economic loss to the people of Southland.

We can also think of the Commonwealth of Australia - a formally constituted commonwealth - and the fiscal relationship that binds the state polities into a cohesive nation. On average, people in Sydney are more prosperous than people in Hobart. But that relationship of Australia-wide taxation and public goods' provision acts to ensure that the people of Tasmania are not exploited, and are able to share broadly in the Australian standard of living. Tasmania could not have reaped such gains had she not joined the Australian commonwealth.

One of the most urgent problems New Zealand faces today is a lack of trained radiotherapists to treat cancer patients. The radiotherapists that we train (and that Australia trains) can be bought by North American hospitals for prices no Australasian hospital could offer. Now, if our training institutions received commonwealth funding (ie from an American-Pacific commonwealth) then we would be able to afford to both train and more radiotherapists than we do now, and to way salaries high enough to persuade most of them to work here.

Any commonwealth requires some formal structures of governance, to focus on fiscal matters, defence and a unified foreign policy. The reason why the world must be divided into more than one such commonwealth is to ensure sufficient decentralisation of governance; to prevent the formation of a world government that could all too easily become the ultimate tyranny.

The solutions become obvious once we understand that the New Zealand economy is a provincial economy within the American-Pacific region. Economic nations provide collective goods (including social security if that is a part of their common culture) on a basis of equality between their respective provinces. New Zealand could be both contributing to and drawing on the collective resources of a more formerly defined American-Pacific commonwealth. That's why we should join Nafta.

© 2001 Keith Rankin

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