Japan-Korea pact danger to NZ trade says professor

By JOHN ROUGHAN

Ross Garnaut, Australian economist, powerful adviser to the Hawke Government, champion of trade liberalisation, sees danger in north Asia.

There is talk in Japan and Korea of a trade pact that could damage other traders with those countries.

They are only having discussions at this stage, he says, but one of the arrangements under consideration would be exclusive, lowering trade barriers between the partners but not to the others.

"If that hardens up, it will have serious implications for open trade in the region."

It could be particularly damaging to Australia and New Zealand, he says, because it would almost certainly cover agriculture.

"I hasten to add it has not happened and may not happen. Traditional Japanese commitments to open regionalism may prevail."

But it was worrying that Japan had even entertained a two-way trade agreement, "because Japan has been firmly committed to multilateralism since the 1930s."

Professor Garnaut, in New Zealand at the invitation of the Pacific Economic Co-operation Council, finds the political climate has turned cool on tariff reductions and market liberalisation generally.

Here, as in Australia, the Government has delayed for five years further tariff cuts for the few remaining highly protected sectors: textiles, clothing, footwear and, in Australia, motor vehicles.

Business opinion in both countries has turned against unilateral moves towards free trade, no longer willing to be, as the Australians put it, "the only virgin in the brothel."

Ross Garnaut is Australia's high priest of unilateralism. "The main reason for trade liberalisation is that it does us good.

"In Australia, the 1990s has been the only decade since federation in which our economic performance has been superior to other advanced countries. That has permitted major transfers to lower income groups."

It might be worthwhile sacrificing some of those gains and holding on to a degree of protection as a bargaining chip in trade negotiations, he says, if we were a large market.

"But let's not kid ourselves. Australia and New Zealand don't have great leverage. That argument would have more weight in the United States, Europe or Japan. But we would be putting a cost on ourselves for no real benefit."

In Australia and New Zealand, political attention is now more concerned with income distribution and the deliberate, quietly spoken professor believes some of the "poor getting poorer" assessments leave a lot to be desired. His research school at the Australian National University has found the lowest income percentile is better off than 15 years ago. Yet reports still focus on the fact that middle incomes are not rising as fast as those at the top.

Public opinion is more favourable to trade liberalisation in densely populated countries, he says. The reason: they have more labour-intensive industries and workers feel the benefits more quickly when markets are opened for those products.

Yet the momentum has stalled in most countries, he concedes, after the Asian crisis and the "Seattle shemozzle."

In countries such as China, the Philippines and Indonesia, which had been liberalising rapidly before the crisis, few new steps have been taken since the 1997 shock. Yet they are still giving attention, he believes, to tackling problems of corporate governance.

In the World Trade Organisation, little can be done until the American elections are well past. And he sees no prospect of a new round of negotiations if developed countries insist on bringing labour standards into it.

He is distinctly unimpressed by New Zealand's moves towards a free trade agreement with Singapore, even as a first step towards a five-nation pact including Australia.

"It's a diversion from the main game," he says. Even if it eventually embraces all of Southeast Asia, it risks discriminating against more important trading partners further north.

It is more important that small countries such as Australia and New Zealand do not retreat from the Apec targets of zero tariffs by 2010. "We are both close enough to be able to achieve that without huge additional structural problems, so we might as well do it."