As the NZ government is considering signing up to the TPPA next year it might be worth looking at the effects of trade deals already in place. Although the Australian Closer Economic Relationship (CER) agreement pre-dates the 10 year old China FTA has wrought the greatest recent change. We are advised by both major political parties that FTA has been a good one and the Ministry of Foreign Affairs and Trade (MFAT) characterises the agreement as one which has“created significant mutual benefits while broadening and deepening our relationship”. The basic figures for the China FTA look good – the NZ$12.3 billion in export goods and services in the most recent year has tripled since 2008. Is that the whole story though?
Any new trade agreement will likely involve more of the same kinds of change as well as unanticipated change and even potentially avoidable impacts. As past behaviour is argued to be a good predictor of future action an assessment of the China FTA and its 10 year impacts would provide a lens for understanding the impacts of any new deal.
So are there downsides to balance against the$8bn / annum in new trade? The National Interest Analysis said that there were to be no “discernable negative social effects in New Zealand” and added that other potential negative impacts elsewhere – environment, employment etc – were to be either mitigated for, protected against or were not allowed by our legislation.
It’s important to say at the outset that the problems are not caused by China but rather by an ideological commitment within New Zealand of giving preference to the FTA over other aspects of national well-being. Most notably in the case of the housing bubble – at the base of the problem was the NZ government’s failure to act to look after the interests of New Zealanders in favour of supporting speculative returns by whomever could afford to buy NZ homes. I have sometimes used inferences about impacts where it seems reasonable but where I couldn’t find articles to back up ideas. In addition the China FTA is quite different in format to the TPPA but subsequent trade agreements in the mold of the TPPA for example with Korea have extended the provisions of the China-NZ agreement in ways not foreseen a decade ago.
- The benefits have not been evenly spread and have tended to exacerbate rather than diminish existing high levels of inequality. This is true both in respect of home-owners versus renters in a tight and speculative market and in respect of the dairy industry and its beneficiaries versus the rest of us. The TPPA’s impact would likely be the same in this respect – importers, exporters and sellers of international goods and services benefit while the rest of us wait for the derided ‘trickle down benefits’.
- Transparency International (TINZ) has advised on the challenges of doing business in China that have included exposure to and participation in corruption including, despite the FTA, the use of the Grey Channels via Hong Kong to ship goods expedited by facilitation payments. Anne-Marie Brady’s research has identified the extent of China’s soft power in NZ as extensive. There are many elements to her research but she reported the loss of local media freedom for the Chinese community to one run by the Chinese Communist Party, While Australia has decided to act on the influence of China in Australian public life, which it is reported includes overseas election spending, espionage and improper foreign influence. Similar issues in NZ have so far raised only the TINZ and Brady’s red flags but no official response.
- Dutch disease is a name for the situation when an overwhelmingly profitable industry sucks all the investment out of a national economy leading to a lack of diversity and consequent vulnerability. It was named for the cause of a crash in Dutch manufacturing following the discovery of a large natural gas field. A Scion Research paper argued NZ’s dairy industry is an example of Dutch disease because of its overwhelming profitability. Why invest elsewhere when there is only one game in town with profits are lower and more risky?
Boom and bust
- Notwithstanding dairy’s earlier profitability this 2016 Reuters article describes the downsides to New Zealand farmers dependence on the milk power market with China. ‘After the “good times” has come oversupply and stock-piling of milk-powder’ it said. This has led to indebtedness, farmer suicides, bank pressure and bankruptcy risk leading to farm-sales and a pay-out well below the costs of production. Having taken on huge debts to convert to dairy the farms can’t are victims of the internationally set market-price for milk powder. Forestry too is a price taker because of being a significant commodity resource for exports to China, and not as a source of added value timber products from NZ. Indeed NZ lumber has been increasingly milled overseas and sent back to NZ for sale.
Speculative housing bubble
- As mentioned above house prices increases driven in large part by non-resident speculators buying properties has been a self-inflicted injury (in contrast with Australia and Canada for example who faced the same challenges and took action to limit speculative purchases). Various commentators have said that such sales only apply to 3 in 100 homes and therefore isn’t a problem. But isn’t housing much like musical chairs. 8 participants and 8 chairs and everyone has a seat. 7 chairs and there is a competition or in my analogy a homeless family and rapidly rising prices.
- Speculative house purchases will be reined in by new legislation and government commitments to housing are likely to dampen the bubble over time so this is less of a problem for future FTAs but the last housing bubble has embedded a problem which will take decades to resolve.
Extreme levels of private debt
- House price inflation and dairy debts are some of the root causes of New Zealand’s private debt which per head of population is breath-takingly large by international norms and also growing rapidly. This puts highly indebted farmers, home-owners and others at risk of bankruptcy in a downturn. According to Westpac Senior Economist Satish Ranchhod New Zealand’s household debt is $256Bn. Although the ultimate risk is held mostly by Australian-owned banks, overall private debt has increased by more than 60% over the 10 years of the China FTA. In just the latest year it has risen by 7.3% or about $38bn (In contrast the total overseas trade for NZ over the same period was $63.5bn). It currently stands at 94.3% of GDP. By comparison a rapid increase of Ireland’s private debt, also driven by a house price bubble, to only 60% of GDP, was instrumental in a catastrophic decline in the country’s economic fortunes during the Global Financial Crisis.
- Fonterra, and dairy farmers – supposed major beneficiaries of the increased trade to New Zealand have taken on huge additional debt to increase milk powder production. A 2015 NBR article said that Fonterra has $7b of debt and farm debt is reported as $59bn. An RBNZ report from earlier this year shows that the “share of vulnerable farms had increased”. Who knows how much of the dairy industry’s accumulated debt can be laid at the door of the China FTA but should a flagship policy of a ‘rockstar economy’ be regarded as a success if it brings in its wake massive and dangerous, increases in indebtedness which makes more likely bankruptcy and fire sales including to overseas interests?
Over-ridden employment protections
- When Wellington’s new trains had to have asbestos removed, (despite a contract and explicit instructions that it not be used), MBIE reported that the New Zealand employment law did not apply to Chinese workers who were brought in to do the repairs “as they were based in China and here only temporarily for work”. Union members reported that the workers were broke and hungry. This arrangement could continue for the 25 years of the contract, displacing NZ based workers.
- The FTA has led various commentators to speculate on (and infrastructure companies have displayed enthusiasm for) infrastructure contracts using temporary Chinese workers based on off-shore boats (and therefore employed under Chinese labour rules). Whether this is what was envisaged when the FTA was signed – and whether having our roads and homes built by migrant labour employed long-term on overseas labour standards and wages is acceptable to New Zealanders is an unexplored area of our national life.
Low quality steel
- Imports of steel manufactured, tested and certificated manufactured by Chinese companies alleged to be second and third tier producers has not met the certified standards. Radio New Zealand has reported that New Zealand has become the NZ the ‘wild west’ of steel testing but the problems have been common to other countries when imports of Chinese manufactured steel have been made at prices that are ‘too good to be true”. In one case a Chinese testing company was deregistered when the testing was found to be faulty. Meanwhile reports have shown the faulty steel has been used in the Canterbury earthquake rebuild as mesh to strengthen foundations and some of the roads of national significance infrastructure where additional concrete has been laid to mitigate the understrength steel as well as in shopping centres. The Commerce Commission’s investigation into the quality of steel imports has led to a report but a decision not to prosecute cases against the importers of the steel.
Negative Environmental Impacts
- The corresponding negative externalities of intensive dairying include at least three newly compromised aquifers (in Canterbury, Hastings and Wellington/Hutt) as well as rivers, including most noticeably the Selwyn no longer flowing along its course. Concessions for water bottling of high quality spring water are highly controversial and are available to China by virtue of the Korea FTA and the China FTA’s most favoured nation provisions and we have lately discovered that no fee option for overseas bottlers is possible. The bottling from source consents potentially open councils to the risks of having to allow bottling even under drought conditions and to compensation cases if the water ceases to be potable in its untreated form.
Suspension of democracy in Canterbury
- Linking the suspension of democracy in Canterbury to the China FTA in the rush for irrigation to feed the dairy frenzy might be to draw a long bow. But the cuts to democracy happened specifically because the then government put economic exploitation ahead of environmental risk management because that would support the intensification of dairying in the region.
Cloth ears about recycling
- For all the closer relationship brought about by the Free Trade Agreement New Zealand government and our retailers have been remarkably unprepared for the “latest” problem with exporting recycling from NZ to China. The ban on plastics for recycling which came into force on January 1 was put in place in July last year when it was notified to the World Trade Organisation. Little warning you might think but in fact China’s direction of reducing imports for recycling was signalled in 2013. Given the “close relationship” and “successful agreement” – which includes much about cooperation – that neither industry nor government was prepared for this and our plastics will once again be sent to landfill or exported elsewhere is rather depressing.
So in summary against the $8bn in additional trade we have to balance serious Chinese government influence in NZ’s Chinese language media as well as other serious corruption and sovereignty concerns, a boom and bust economy focussed on commodities with a crowding out of higher value investments, a suspension of local democracy, a house price bubble, huge and unsustainable levels of private indebtedness including a major industry – the dairy industry – that is highly indebted at both farm and manufacturing level, poisoned aquifers, poor quality imports, lack of preparedness for banned trade items and loop-holes in labour laws. The challenges of the TPP are not the same as those of the China FTA but the impacts and their unforeseen nature are surely as important in guiding whether the FTA is, on balance, beneficial to New Zealand and if those benefits will be widely shared.
We should surely be including analysis – more complete than this rough and impressioniustic sketch – of the downsides of existing Free Trade Agreements in our consideration of new ones.