Towards a comprehensive free trade agreement

“Greater economic freedom is ultimately inseparable from political liberty. Economic freedom empowers individuals, and empowered individuals increasingly demand greater political freedom.  Greater economic freedom also leads to greater economic opportunity and prosperity for everyone. History has judged the market economy as the single most effective economic system and the greatest antidote to poverty.”
-  White House briefing on US FTA policy

On 5 February 2008 the United States announced that it was prepared to join negotiations on financial services and investment with the Trans Pacific Strategic Economic Partnership or “P4” group which includes New Zealand, Singapore, Chile and Brunei.  US Trade Representative Susan Schwab also said the US would begin a “detailed exploratory process” to determine whether it should participate in full free trade negotiations with P4.

2.  The New Zealand United States Council Chairman, Rt Hon James Bolger, welcomed this “positive development” noting that “this is the first time the United States has ever committed to commence negotiations with New Zealand.”  Mr Bolger said the negotiations on financial services and investment could lead to a full free trade agreement which, if successful, “would ultimately put New Zealand on a level playing field with competitors in the American market, lead to improved market access and higher returns”.

3.  The NZ US Council has been working, together with its partners in both government and the private sector, towards a free trade agreement with the United States since the Council’s inception in 2001.  The Council has consistently advocated that a comprehensive, high quality free trade agreement (FTA) between the United States and New Zealand would make sense for both parties.  This paper provides background to the case for a comprehensive FTA.

4.  An FTA between New Zealand and the United States would make a major contribution to:

• advancing the concept of freer trade and spreading the rule of international trade law in the Asia Pacific region and more generally within the World Trade Organisation (WTO);
• expanding two way trade, opening up new opportunities for US business in New Zealand, accelerating economic growth and fostering innovation, strategic investment and entrepreneurship in the New Zealand economy;
• cementing the longstanding ties of friendship and economic co-operation between New Zealand and the United States.

Freer  trade promotes growth, innovation and security

5. Global economic and structural changes have not lessened the importance of gaining better access to new markets for business.   Eliminating trade barriers and expanding trade and investment are among the most powerful ways of generating additional economic growth and promoting innovation in the domestic economy.  In addition trade liberalisation promotes economic well being, an important means of ensuring security and political stability.  Both the New Zealand and US Governments place key emphasis on achieving effective trade liberalisation.

6.  New Zealand has made a strong contribution to international trade liberalisation since the mid-1980s:

• In 1983 New Zealand concluded CER with Australia - arguably the world’s most comprehensive and successful free trade agreement;
• Since 1984 an ongoing process of economic restructuring has made the New Zealand domestic market one of the world’s most open and transparent;
• In the WTO and its predecessor the GATT New Zealand has always played a role disproportionate to its size reflecting the heavy export orientation of New Zealand’s economy.

7.  More recently New Zealand has demonstrated its commitment to the principles of openness and the rule of law in international markets by:

• Concluding free trade agreements with Singapore, Thailand, Brunei and Chile;
• Being the first OECD country to commence free trade negotiations with China;
• Commencing negotiations with Malaysia, with the countries of the Gulf Co-operation Council, and,  together with Australia, with ASEAN;
• Continuing its active participation in APEC and the WTO.

8.  New Zealand’s interest in concluding free trade agreements in the Asia Pacific region has been a matter of public record since before the conclusion of the WTO’s Uruguay Round.  These initiatives confirm New Zealand’s positioning in the forefront of countries which seek to build support for the concept of freer trade in the Asia Pacific region in line with the goals of APEC (Asia Pacific Economic Co-operation) grouping.

9.  For its part the US Administration, during the term of the last Trade Promotion Authority (TPA) (2002 – 30 June 2007) , actively negotiated free trade agreements.  Early FTAs with Israel (1985) and with Canada (1989) and Mexico through the North American Free Trade Agreement (1994) were followed by agreements with Singapore (2004), Chile (2004) and Australia (2005), Korea (April 2007) and a range of countries in the Middle East (Morocco, Jordan and Bahrain) and Central and South America (Colombia, Peru and Panama).   Negotiations are also underway with Thailand and Malaysia. Congress is currently considering whether to ratify some of these completed negotiations (including, most importantly, Korea).

Why New Zealand? 

10. The United States and New Zealand are well suited as free trade partners for three key reasons: shared values, complementary resources, and because of the support that already exists for a negotiation in US business and political circles.  While FTAs are inevitably complex undertakings there are valid reasons why agreement between New Zealand and the United States should be able to be concluded in a much shorter time than other agreements.

Shared values

11. The two countries share much in common – much more, in fact, than the United States does with some countries in the Americas, Asia or even Europe: 
• Apart from our common language and status as fully developed “new world” economies, our armed forces have fought together in the two world wars and New Zealand consistently supported US interests in every major conflict in the 20th century and latterly in the global campaign against terrorism;
• Our cultures are relatively aligned and we continue to stand together on many of the same global issues, such as the promotion of democracy and human rights, the advantages of freer trade and the rule of international trade law and the importance of sustainable development;
• Both are close allies in the WTO and committed to the goal of free trade and investment amongst developed economies in the APEC region by 2010;

• Both countries now have agreements with Australia, Chile and Singapore; New Zealand has an FTA with Thailand and the US is negotiating one; and both countries are negotiating with Malaysia

Complementary resources

12.  Countries that possess complementary skills or resources can be well positioned to establish successful and mutually beneficial trade and economic relationships.  Possible US-New Zealand synergies include:

• New Zealand’s lower cost but highly skilled labour market;
• Our highly competitive natural resource-based industries - agriculture, food processing, biotechnology, forestry and fishing; and
• Our leading edge software, telecommunications and film industries. 

13.  All of these provide possibilities for investment and strategic alliances for US industry.  US investment in New Zealand is already greater than in many other countries which have negotiated an FTA with the US, including Central American countries, Chile and Israel.

Support in the United States

14.  In the US New Zealand’s case continues to be strongly supported by US business interests, including:

• the National Association of Manufacturers (NAM) which in February 2005 placed New Zealand among its five preferred candidates for a FTA (alongside  Egypt, India, Malaysia and South Korea) and in February 2008 expressed its strong support for the announcement that the US would join negotiations on investment and services with the “P4” Group ;
• the US Chamber of Commerce, whose President, Tom Donahue, has spoken consistently in favour of an agreement with New Zealand and applauded the P4 investment and services announcement;
• the National Foreign Trade Council, representing 300 member companies in the US;
• the Free Trade Coalition co-ordinated by the US NZCouncil.

15.  Congressional support is vital for the US free trade agenda.  New Zealand already enjoys strong support in the Congress - both in the House and the Senate as shown by the following: 

• Several letters to the President signed by Congressmen and women from both sides of the House have recommended negotiations with New Zealand;
• Republican Presidential Candidate, Senator John McCain (R-Arizona) and leading Senators Baucus (D – Montana) , Grassley (R-Iowa)  and, Sununu (R-New Hampshire) have also advocated a negotiation with New Zealand;
• A Friends of New Zealand Caucus was established in the Congress in February 2005 led by (now former) Representative Kolbe (R-Arizona) and Rep. Tauscher (D-California):  Kolbe and Tauscher wrote a letter to former US Trade Representative Ambassador Rob Portman advocating an FTA negotiation with New Zealand.  Kolbe has been replaced as co-chair of the Caucus by Kevin Brady (R-Texas).  In March 2008  22 members of the Friends of New Zealand Congressional Caucus wrote to US Trade Representative Susan Schwab to support the Administration’s decision to enter negotiations on financial services and investment with P4 including New Zealand.  Link to full text of letter.

16.  Congressional support, particularly on the Democrat side, is enhanced by the absence of any difficulty New Zealand might pose in terms of non-trade issues such as environment or labour.  In May 2007 the Administration agreed with the Democrat-controlled Congress that future negotiations would have to include binding commitments on environment and labour.  This could increase New Zealand’s attractiveness as a negotiating partner, while discouraging some others, particularly developing countries.

What’s in it for New Zealand and the United States?

17.  In March 2002 a report prepared by Fred Bergsten and Rob Scollay  found strong economic, political and trade policy reasons for the early launch of negotiations between New Zealand and the United States.  They advocated that the agreement be pursued alongside or together with negotiations between Australia and the United States since the New Zealand and Australian economies were already closely integrated through CER.

18.  Bergsten and Scollay estimated that New Zealand exports to the United States would increase by 51 percent in the case of a purely bilateral NZUS FTA and 49 percent in the case of an FTA linking all three countries.  US exports to New Zealand would rise by about 25 percent and virtually every US sector would benefit.  The adjustment costs for the United States would be minimal – production in the most impacted sector – dairy – would decline by only 0.5 percent.

19.  Bergsten and Scollay concluded that the largest gains, especially for the US would come from the strategic benefits.  An FTA would help accelerate the momentum of trade liberalisation by inducing other trading partners to participate actively in a trade liberalisation process.

State of play with New Zealand

20.  The 5 February 2008 announcement that the US would enter into negotiations on financial services and investment with the Trans Pacific Strategic Economic Partnership or “P4” marks a very significant development for New Zealand being the first time the US has ever committed to enter negotiations with us.  The announcement was in some ways unexpected given the expiry of the President’s fast track trade promotion authority (TPA) on 30 June 2007 and the additional hurdle the Administration now faces of securing congressional support as negotiations proceed.  That said, the decision to enter negotiations indicates a belief on the part of the Administration that Congressional support for a negotiation with “P4” is achievable.

21.  The importance of securing Congressional support should not however be underestimated.  As negotiations commence and the US engages in a “detailed exploratory process” to determine whether it should participate in full free trade negotiations with the “P4”, the NZUS Council, and its partners within government and business, will need to take every opportunity to advocate and reinforce the case for comprehensive FTA negotiations with Congress and influential US business interests.

22.  In considering whether to enter into full free trade negotiations with a grouping including New Zealand, a number of perceptions about New Zealand may be considered.  One may be the traditional US perception that New Zealand represents only limited economic opportunity, given its small size and already open market.  This view should be ameliorated as the P4 agreement involves four economies and is designed to allow others to join.  The strategic significance of the US negotiating with a trans-Pacific partnership is likely to be viewed positively.  In domestic political terms opposition to an FTA involving New Zealand can be expected from US agricultural (particularly dairy) lobbies and, unlike with Australia, the Administration is not able to point to New Zealand’s status as an ally to overcome this opposition.  That said, any political issues that may have impacted on earlier US decisions not to enter into negotiations with New Zealand e.g. as a result of differing views on nuclear issues or Iraq, have not prevented the P4 decision on investment and services.  Concerted efforts by the NZUS Council, government, and our partners in the business community to strengthen the NZUS relationship in recent years appear to have borne fruit in this regard.

Conclusion

23. The 5 February 2008 announcement that the US will enter into negotiations on financial services and investment with the Trans Pacific Strategic Economic Partnership or “P4” marks a very significant development in the long term efforts of successive New Zealand Governments, officials and the NZUS Council to secure free trade negotiations between New Zealand and the US.

24.  As the US engages in a “detailed exploratory process” to determine whether it should participate in full free trade negotiations with the P4 partnership, the NZUS Council, and its partners within government and business, will need to take every opportunity to reinforce the case for comprehensive FTA negotiations with Congress and influential US business interests.

25. It is clear that a comprehensive free trade agreement between New Zealand and the United States, achieved either bilaterally or through the “P4”, would bring together two countries which share fundamental beliefs and values and have been among the most committed to trade liberalisation. 

NZ US Council
February 2008