Free trade - wooing Uncle Sam

Why would the US want a free trade deal with New Zealand - and will the price be too high? SIMON COLLINS reports.

One big, embarrassing fact threatens the push for a free trade agreement between New Zealand and the United States: we would do much better out of it than them.

The director of the Institute of Economic Research, Alex Sundakov, put numbers on it at a conference organised by the New Zealand Apec Business Coalition in Auckland last week.

New Zealand, he estimated, stood to gain $1 billion a year if the US eliminated import duties and restrictions on our products, including dairy produce, meat and manufactured goods. That would boost our national income by 1 per cent.

As Mr Sundakov put it: "That's a lot of radiotherapists."

But New Zealand has already abolished all import restrictions and duties on all goods except clothing, shoes and textiles.

If we axed those remaining duties on US textiles and services, the benefits to the US would be a mere $US200 million ($480 million) - 0.002 per cent of their national income.

"Why would they bother?" was the big question at the conference. Or to put it more positively: "What can we offer them?"

Lots of ideas were put forward, some not very palatable.

Mr Sundakov, for example, suggested we might have to relax our restrictions on genetically modified organisms, change our medicine-buying policies, ban "parallel imports" of CDs and other products and loosen rules restricting Americans from buying our land.

These were just the opening shots. They suggest that last year's free trade deal with Singapore, which made the Alliance "agree to disagree" with Labour for the first time in their coalition, could be a breeze compared with the storm to come over the US.

The stakes are immensely higher. The US is the world's biggest economy, accounting for 30 per cent of total global income, and our second-biggest export market.

As we have free trade with our biggest market, Australia, Trade Minister Jim Sutton has said the US is our next priority.

For most of the past century, it has led the world technologically and in competitive pressure to invent new goods and services. If free trade encourages more NZ firms into the US market and vice versa, then the NZ firms are likely to pick up new techniques and ideas faster.

These "dynamic" effects, says Mr Sundakov, are usually much greater than the "static" effects that come from simply eliminating import duties.

The business leaders at last week's conference were in no doubt.

Andrew Grant, of McKinsey, called on business to be "advocates, not realists" on the issue, and for the whole country to commit itself to pursuing free trade with the US "in a Singaporeanesque way that we have never seen before".

"It's one of those moments in history."

Craig Norgate, who heads our biggest company, Fonterra, said: "We simply must focus on this as the biggest deal we'll ever make."

But what can we offer to start the process? Options include:

* A joint offer with Australia. If we are too small to count for much alone, one obvious solution is to team with Australia, whose Trade Minister, Mark Vaile, is off to Washington next month to push his country's case for its own US trade deal.

Mr Sundakov said free trade with Australia would yield $US2 billion a year in direct "static" benefits to the US, and the combined Australasian market could be big enough to offer America some dynamic gains as well. US Ambassador Charles Swindells said a combined Australasian approach "would be helpful".

* Duty-free entry for US clothing, shoes and textiles. New Zealand can happily offer duty-free entry to American textiles because the local industry believes it would be highly competitive.

Apparel and Textile Federation chief executive Paul Blomfield says NZ designers pay duties of 4 to 45 per cent when they sell their garments to leading US stores.

"I think it [free trade] would cause a boom in NZ apparel manufacturing that we haven't seen before."

* Services. New Zealand is already totally open to US service companies in fields such as banking and communications, and an "open skies" agreement allows airlines from each country to fly to and beyond the other.

But officials see room to offer greater mutual recognition of professional qualifications, allowing American-trained doctors, teachers and other professionals automatic registration here.

* Government purchases. Last year's Singapore agreement provides that both governments must publicly notify any planned purchases of goods or services worth $137,500 or more, and that businesses from both countries should be treated equally in supplying such goods or services.

The US would like New Zealand to join an international agreement on state purchasing, but NZ's senior services negotiator, Tony Lynch, says this is "more cumbersome" than the Singapore deal.

* Land. The only seven applications for foreign investments turned down in the past year all related to land, which foreigners can buy only if it is in New Zealand's "national interest" by creating jobs, access to markets, etc. We could offer to exempt Americans.

* Other investments. The US may push for provisions similar to those in the North American Free Trade Agreement (Nafta), which says foreign investors must be treated as well as local ones and be able to sue Governments which reduce the benefit of, or "expropriate", their investments.

* GM organisms. Mr Sundakov warned of "a very significant coalition of interests in the US that will make life very difficult for us in any negotiation if there are difficulties in access [to NZ] for genetically modified products".

* Parallel imports. US exporters of copyrighted products such as books, CDs and software oppose the previous Government's 1998 decision to allow "parallel imports" from sources not authorised by the original manufacturers, claiming this amounts to legalising "piracy". This policy is under review, and a compromise could be offered in trade talks.

* Medicines. US drug producers object to the state purchasing agency Pharmac's refusal to subsidise new medicines except at prices below those of existing subsidised medicines for the same ailments.

Mr Sundakov's institute is preparing a report for the multinational medicine companies on the contribution they can make to New Zealand's "knowledge economy" by buying, developing and marketing the products of local biotechnology firms.

The multinationals already argue that they need fairer treatment by Pharmac to justify investing here, and the US is likely to use free trade talks to push their case.

* Defence. A workshop group of investment and service firms chaired by Andrew Grant suggested that NZ should back the US on "security issues: moral support, intelligence, 'boots on the ground'."

* A model for the world. In contrast to the risks in all the above, the option most favoured at the conference was simply to offer NZ as an easy country to deal with because there are already so few trade barriers. That is why our Government has pursued its first deals with city-states that are free-traders: Singapore and Hong Kong.

As Craig Norgate put it: "New Zealand should represent low-hanging fruit for the US as it seeks to achieve wider trade liberalisation."

But Mr Sundakov believes this may not be enough.

"In order to make this very exciting project a reality, we have to make this an overall package that has both both political and economic elements that will be of significant interest to the US.

"We have to push for internal NZ debate - not just to be ready and willing, but to ensure that we can put up a more political and economic package that would be of interest to the US."

That debate may be bitter. Anti-globalisation protests around the world suggest that many New Zealanders will resist any Nafta-style rules allowing American companies to sue the Government over laws passed democratically by Parliament.

The Greens insist that Parliament and local councils must have the right to give preference to local suppliers against imports to preserve local jobs and reduce the need to pump out carbon dioxide by transporting goods over long distances.

Yet Nafta's rule that foreign investors must be treated as well as local companies has ruled out such local preferences in North America.

The Greens and the unions also oppose any move to force New Zealand law to treat foreign-owned health and education providers the same as local providers, including paying them the same state subsidies.

On the other side of the political spectrum, there is a risk that free trade with the US alone would merely divert our imports from other countries to the US, without necessarily achieving any net gain.

We may end up buying more American CDs, for example, and fewer from China where they are cheaper.

But compromise is always possible, which is why most trade deals are not complete "free trade" agreements at all. Nafta, for example, excludes dairy products.

We can be sure that both Australia and America will want exceptions in any new trade deal, and there is no reason why NZ should not look to its own interests too.

Political approval will be needed in the US, where any deal will be negotiated by Trade Representative Bob Zoellick or his staff and will then be presented by President George W. Bush to the Senate for approval.

Under a "fast-track" law passed by the House of Representatives last week, the Senate will be able to accept or reject a deal, but not amend it.

The New Zealand Government can legally sign trade deals with anyone without going to Parliament. But officials expect the Government to abide by the same process it followed with the Singapore deal last year and seek Parliament's approval voluntarily.

Public reaction to the controversial tradeoffs involved is likely to be crucial.

Nafta has reduced the democratic sovereignty of its member states, just as the European Union has done in Europe.

If the deal becomes a reality, New Zealanders may face an awkward choice - how much of our sovereignty are we willing to give up for the potentially huge economic gains of free trade with the US?