Monday, 12 March 2018

Jim Rose on free trade agreements

When teaching my students about the gains from trade, one of the points I like to make is to draw the distinction between free trade and free trade agreements. The takeaway from that distinction is that it is perfectly reasonable to be in favour of free trade, and yet simultaneously be against a given free trade agreement. There is no contradiction in taking those two positions, and you wouldn't understand that by reading most of what is written in the media about free trade agreements. All too often, in the debates around free trade agreements, the two sides are completely talking past each other. The pro-free-trade camp uses the 'gains from trade' argument, but essentially ignore the fact that free trade agreements include a bunch of other clauses that have little to do with trade. The anti-free-trade camp focuses on those other clauses, but ignores the fact that there are gains from reducing tariffs and non-tariff trade barriers.

Obviously, I'm not the only one who feels that way. Whether we should support a free trade agreement (including the recently-signed CPTPP) should come down to evaluating the costs and the benefits of the agreement for New Zealand. This point was made in an excellent Jim Rose article in the New Zealand Herald last week. It's difficult to excerpt without losing the key points, so I quote it at length:
Free trade agreements are at best suspect. That is not me saying this, it is Paul Krugman, his generation's leading trade theorist.
Krugman argues you should start as a mild opponent of any free trade agreement. Closely inspect the baggage they carry — environment and labour chapters, intellectual property, investor state dispute settlement (ISDS) and government procurement such as Pharmac. Start with a sceptical eye.
These add-on chapters are the costs of free trade agreements that are relatively obvious to the untrained eye. No technical economics is yet required to suspect that any trade agreement will be an opportunity for special interests on the right and left, unions and big corporations, to feather their own nest. Longer patent lives, more stringent enforcement of overseas copyrights, Pharmac buying more expensive drugs and so on, in return for tariff cuts in export markets.
But let us start with what is claimed as the benefits by the Government. In a TPP without the US, in about 30-years' time, as little as 0.3 per cent extra GDP and at most 1 per cent more GDP in sum will be generated. Less than one quarter of these modest gains over 30 years come from tariff cuts.
The rest of the gains are from behind-the-border changes from streamlining customs to investor state dispute settlement — never easy to quantify because even the most impartial spectators can disagree on whether these regulations are a plus or minus to begin with...
With the US out of the TPP we still have all the baggage from environment and labour chapters, intellectual property, threats to Pharmac, and ISDS. The costs have not gone down but the benefits have, because of the loss of the single biggest market.
Investor state dispute settlement has no place in trade agreements between democracies that have the rule of law where investors can take their chances in domestic politics just like the rest of us. Yes, there will be breathless populism from the left or right from time to time, such as recently over foreign land sales, but by and large foreign investment is welcome and gets a fair deal.
Developing countries offered to sign on to investor state dispute settlement because their own courts are corrupt.
Maybe investor state dispute settlement worked 50 years ago when investment in developing countries was tiny and handled by a few big players who might get picked on by politicians looking for a few cheap votes or more likely, a backhander to the Swiss bank account...
Most of these points were lost in the debate on the TPP because too many of its opponents are driven by anti-capitalist or anti-foreign sentiments rather than cost benefit analysis. They would oppose a trade agreement solely about tariffs that lowered prices to New Zealand consumers.
Not every trade negotiation is successful. For some, you reach the point where you must walk away. More so because of all the baggage loaded into trade agreements in the last few decades.
There should be a hard-nosed benefit cost analysis. When the US was in, the TPP might have been worth the risk, just. More access to the US market may have made up for all the other baggage. Now the price has gone up, so much so we probably should not be signing it today.
It's pretty clear what conclusion Rose is drawing on the CPTPP. Whether you agree with him or not should come down to how you value the benefits in terms of increased trade, against the costs in terms of loss of sovereignty to the investor state dispute settlement process, stricter intellectual property enforcement (which some might see as a benefit) and so on. As I've said before, I'm agnostic and will remain so until I see some defendable analysis of the impacts of ISDS, which has been notably absent from the economic analyses of this agreement.

Read more:


  1. Thanks. They edited out the paragraph where I mentioned I asked under the Official Information Act whether any of the briefings to ministers on the benefits and costs mentioned trade diversion. They did not.

  2. I also edited out the trade diversion stuff from my quote of your article. I couldn't in good conscience copy-paste the whole article! Hopefully anyone interested will read the full article.