Charles Finny: Making sense of the US-China dispute

US President Donald Trump meets China's Vice Premier Liu He in the Oval Office last month. Photo / AP

COMMENT:

The current tensions between the United States and China should be a concern for every New Zealander.

Beyond steel and aluminium and the US withdrawal from what was known as Trans-Pacific Partnership (TPP), New Zealand has not been affected directly by the Trump Administration's "America first" mentality.

Unfortunately, recent developments suggest this could be about to change. The worst-case scenario could see billions of dollars of displaced US agricultural products sold at low prices on world markets, massive new agricultural subsidy programmes distorting trade flows and prices, enormous pressure on New Zealand to stop buying Chinese technology or to co-operate with Chinese universities or research entities, Chinese retaliation stretching beyond tariffs to large devaluations of the Renminbi (RMB), bans on the exports of rare earths, and a refusal to buy further US treasuries.

We already see extreme nervousness across global capital markets that things could turn very bad. If fear becomes reality we could see a material hit to the global economy. Given current fragilities, this is not a good thing.

Beyond these potential direct impacts, every New Zealander should be worried about the implications of what is going on for the rules-based international trade system.

As a medium-sized economy dependent on international trade for our prosperity we need the World Trade Organization (WTO) system to be operating effectively. If it doesn't, then larger players can act on the basis of blatant self-interest in a way that potentially impacts New Zealand interests. The current tariff-rate increases by the United States are a blatant breach of US WTO commitments.

Likewise the steel and aluminium tariffs imposed on New Zealand and many others are also a breach of WTO rules. In normal times the WTO's dispute settlement mechanism would kick in. Chinese, New Zealand and other complaints would be heard. An initial ruling would be made. This would be appealed, and then a final ruling made.

Most WTO members have, most of the time, faithfully implemented panel decisions (or reached out-of-court settlements with the complaining party or parties). If they don't, then retaliation is allowed.

Unfortunately, these are not normal times. The US has for several years been vetoing the appointment of judges to the WTO Appellate Body. Three are needed to hear any case. And no judge is allowed to hear a case involving their home country. There are just three judges left. One from the US, one from China and one from India. So this means that no cases involving the US, China or India can now be heard. In a few months, when the next judge retires, the whole system breaks down because no cases can be heard. Unless, of course, the US changes its position and allows new judges to be appointed.

Short-term, the displacement of trade between the US and China might create some opportunities, particularly in a Chinese market facing a protein challenge due to a disease ravaging the swine herd.

Our red meat sector is already benefiting from this, and the US is now unlikely to be competing against us due to high tariffs. But long term, no one will gain from the current dispute.

What should we be doing?

First, we don't need to take sides.

Second, we should be working with others to try to defend the WTO rules-based order.

Third, we should be expanding our already extensive free trade agreement (FTA) network. We should be redoubling efforts to conclude the FTA negotiation with the EU and to complete the Regional Comprehensive Economic Partnership (RCEP) linking New Zealand and Australia with India, ASEAN, China, Korea and Japan. And we should be seeking to plug the remaining gaps in our FTA network — US aside, I am thinking South America's Mercosur countries, Colombia, Sri Lanka, the Gulf, North Africa, Nigeria, Angola and Turkey.

Fourth, we should be working on a plan B. It would be great to think that current problems may not outlast this US administration. Unfortunately I suspect that current disputes are manifestations of deeper problems. Obama began the process of vetoing WTO Appellate Body Judge appointments.

Tensions with China were also on the rise in the last part of the Obama presidency. I don't see too much daylight between Trump's trade policy and that being advocated by Democrat presidential hopefuls.

Our plan B has to be centred on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and RECP. We should expand CPTPP as quickly as possible. Korea, Thailand, Indonesia, Taiwan, Hong Kong and — if interested — China should all be encouraged to join quickly.

And when our FTA with the EU is completed we should be talking about linking CPTPP and EU rules.

If we do that we would have a very large proportion of world trade using the same enforceable rules. If the WTO system cannot be saved, many others will seek to join us. If the WTO continues, then some of the CPTPP/EU rules and commitments might be transplanted there.

What about the US? I have, for most of my professional career, been advocating a FTA between the US and New Zealand. Unfortunately I don't think we should be contemplating an FTA at present. I can't see good concessions being made on agriculture, but I can see plenty of demands on biologics, pharmac and on intellectual property.

Let's wait for the US to sort itself out. It probably will. Then it just might come knocking on the CPTPP door.

● Charles Finny is a partner in Saunders Unsworth and a former NZ trade negotiator.