John Ballingall: What can New Zealand learn from Brexit?

It has now been over three years since the June 2016 Brexit referendum. Photo / 123RF

COMMENT:

The Brexit dramas continue apace. A deal has been struck that satisfies the EU and has passed the UK Parliament, to a point. But a further extension is likely to allow legislation to be properly considered, potentially accompanied with a general election.

It has now been over three years since the June 2016 Brexit referendum, so timely to consider what New Zealand can learn from the unholy mess since.

We can't assume that all Kiwis support trade liberalisation

Large parts of the UK society struggle to see what membership of the EU had done for them personally. Similarly, a key driver of the split in long-held bipartisan support for trade policy in New Zealand during the TPP negotiations was a concern that previous trade agreements had failed to deliver for all parts of New Zealand society.

The benefits to New Zealand exporters were usually fairly easy to identify. But trade is ultimately about improving the living standards of Kiwi households, primarily through increased wages, more consumer choice or more employment opportunities.

We now have entire generations with little understanding of how different the economy was – in terms of consumer choice and prices – before the 1980s reforms. We need to do a better job of helping younger Kiwis understand how economic integration improves their lives on a daily basis.

Thankfully our trade negotiators and politicians are now making a much better fist of talking with – and listening to – the public before and during negotiations. The 'Trade for All' agenda has been launched following consultation. A new forum, Taumata, has been established for discussing trade matters with Māori.

Greater public engagement and understanding will set limits to partisan debate and hopefully give a renewed sense of bipartisanship.

Trade is only ever part of the picture for improving wellbeing

We must also be careful to manage expectations on what trade policy can and can't do.

The Brexit discussions became entangled with all sorts of other knotty issues in the UK, such as the underfunding of, and excess demand for, the National Health Service. That is a very real problem, but it's not one that can be solved by leaving the EU.

British Prime Minister Boris Johnson. Photo / AP

To misquote Homer Simpson, trade is neither the cause of, nor the solution to, all of New Zealand's woes. It can't solve by itself climate change challenges, water quality, inequality or housing affordability.

But it can contribute to all of these objectives in conjunction with other domestic policy settings. That story needs to continue to be better developed.

Sovereignty is always a vexed issue – it is never absolute

A further lesson from Brexit is that the issue of national sovereignty can arouse enormous passion. One of the main reasons behind hard Brexit supporters' desire to have a clean break from the EU is greater autonomy over immigration, trade policy and legal matters.

We've seen similar sovereignty-based discussions here too, namely around whether New Zealand should commit to Investor State Dispute Settlement (ISDS) clauses in our trade agreements. During the TPP discussions, concerns were raised that ISDS might lead to regulatory chill in fear of foreign investors suing the government.

Yet a close look at the eventual CPTPP text shows that New Zealand's right to regulate for legitimate environmental, health, Treaty of Waitangi and other public policy reasons is well and truly preserved.

A key reason for joining international initiatives, be they the Paris Accord on climate change or a multilateral trade agreement, is that we want other countries to stop doing things we find abhorrent. We can't force them to stop by ourselves, so we join forces with others to build a critical mass.

But if we want others to make legally binding commitments to stop doing things they might want to (i.e. give up some of their sovereignty), we have to give up a bit of ours too.

The key then becomes addressing stakeholder concerns as they arise, pointing out the safeguards, and highlighting the expected costs, benefits and trade-offs.

In trade and foreign policy, there is no substitute for face to face meetings and building personal relationships

Another feature of Brexit is that many UK negotiators and politicians have come and gone over the past three years. Some had more success than others in managing relationships in London, Brussels and other EU capitals. But the churn of faces, personalities and negotiating styles hasn't helped the Brexit negotiations.

All effective trade negotiations are founded on trust and relationships. In tough discussions, negotiators need to know when to push, when to back off, when to smile resignedly, when to feign outrage and when to move to Plans B, C and D.

These are learned skills and can only come about through regular in-person contact and understanding what makes the key decision-makers on the other side of the negotiating table tick.

So, we shouldn't begrudge New Zealand Ministers' and officials' overseas travel bills. We have some of the best negotiators in the business. They know they have to be in the room to promote New Zealand's interests, and they do a very good job of it.

Economic integration is rarely just about tariffs any longer

Most UK and EU firms were not so worried about the prospect of paying higher import duties once the UK is out of the Single Market; rather they were stressed about the additional paperwork required to transport goods, risk of delays at the border, the need to ensure employees could work overseas, etc.

Tariffs have been falling over time (with some recent exceptions!) and are just one contributor to transaction costs along global value chains. Non-tariff measures are often much more problematic for businesses. And barriers to services trade throw grit in the engine of international commerce, since most goods exports contain considerable amounts of embedded services.

Investment in the UK has been anaemic as firms hunkered down and waited to see what Brexit would deliver. Photo / Bloomberg

This all points to the importance of economic integration placing a greater focus on services liberalisation, regulatory equivalence and facilitative Rules of Origin that encourage high FTA utilisation rates by firms.

It also highlights the value of New Zealand leading creative partnerships between like-minded countries on modern business issues like digital trade and sustainability, such as the recently launched Digital Economic Partnership Agreement and the Agreement on Climate Change, Trade and Sustainability.

Business uncertainty can have long-lasting negative effects

We often forget that economic disruptions operate with lags. We tend to focus on the last quarter's outcomes and can mistakenly draw conclusions that the expected negative impacts of economic shocks have been over-hyped.

Investment in the UK has been anaemic as firms hunkered down and waited to see what Brexit would deliver. Average economic growth has been around 1.5 per cent. The lack of investment in plant, machinery and equipment will retard UK productivity growth for years to come, as capital is worked past its best-by date and firms battle on with old technology.

Recent surveys in New Zealand show that firms' investment intentions are very soft. This will be a key driver of slower economic growth over the next couple of years, as the lagged effects of current domestic and global policy uncertainty play out.

We don't know how lucky we are, mate

In summary, New Zealand can learn much from the trials and tribulations of Brexit.

We need to keep implementing policy changes that seek to address society's pressing concerns around sustainability and inequality. We need to continue pushing for more diverse and higher quality forms of economic integration. We have to look outwards and forward for inspiration, rather than inwards and backwards.

But this approach can only work long-term if the New Zealand public understands why we're doing so. Politicians, officials and researchers all need to step up to the plate.

- John Ballingall is an economist at independent consultancy Sense Partners.