Philip Turner: NZ can't afford to choose between East and West

A recent Perspectives article by the Prime Minister outlined the Government's progress in achieving a free-trade pact with Thailand and in progressing free-trade-agreement talks with China, Chile, Asean and Malaysia.

Helen Clark is right about the importance of these agreements, and the Government deserves considerable credit for its achievements.

Rewind one year and things did not look good: Australia had stolen a march on us by securing a free-trade agreement with Thailand, and an agreement with China was no more than an aspiration. Now Thailand is a done deal, and there is a good chance we will be the first Western country to achieve a free-trade pact with China, the most dynamic economy on the planet.

But our increasing involvement and success in free-trade agreements, particularly in Asia, raises two important questions: what about the other side of the Pacific, in particular the United States? And does the spreading enthusiasm for free-trade pacts put at risk the broader multilateral system?

New Zealand cannot afford to choose between East and West. Our export markets and our political, ethnic and cultural ties are spread diversely.

Yet recent trends suggest we may be seeing the beginning of a divide down the middle of the Pacific that could make our position uncomfortable.

The past five years have seen dramatic changes to cross-Pacific trade flows. Ten years ago Japan was critically reliant on trade with the US, importing US$40 billion ($55.9 billion) more from the US than from China. Since 2001 that has changed: Japan now imports US$15 billion ($21 billion) more from China than from the US.

The north-east Asia region as a whole (China, Hong Kong, Taiwan, South Korea and Japan) imported US$30 billion ($41.9 billion) more from the US than from Japan in 1995; in 2002 they were almost identical. Imports from the US have actually declined since 2000. Asean trade with China is growing exponentially and is likely to top trade with the US in the next couple of years.

Behind the current weakness of the US dollar is the uncomfortable fact that the US trade and domestic deficits are almost exactly funded by credit flows from Japan, China and Taiwan. These trends indicate a fundamental weakening of the central role the US has played in East Asian economies since the Second World War, and the emergence of a powerful new economic pole in north-east Asia.

Not surprisingly, Asian leaders are increasingly interested in organising their own economic groupings, including free-trade agreements. These mostly exclude the US. East Asia not only needs the US less than before but some say the US now needs East Asia more than East Asia needs the US.

Europe is having remarkable success in expanding its own exclusive economic zone. The European Union now has 25 members, and with the imminent accessions of Romania, Bulgaria and (probably) Croatia is likely to count 28 within three years.

There are dangers in all this for New Zealand, Australia and those who find themselves outside the powerful economic zones of north-east Asia, the North American Free Trade Agreement and the EU.

Apec has been one major attempt to head off that risk, but it has failed to make much progress as an economic zone and risks reaching obsolescence before its time.

The second threat posed by free-trade- agreement enthusiasm is that it undermines the global multilateral system embodied by the World Trade Organisation. Global business needs a single set of global rules, not a complex patchwork of bilateral access arrangements.

Free-trade agreements also risk diverting trade more than increasing it.

Australia's success in negotiating a free-trade pact with the US - while New Zealand languishes in the queue - has created the risk of business going across the Tasman rather than to New Zealand.

The Prime Minister is right to stress that New Zealand cannot afford to be excluded from the world's most dynamic economic zones. She is right to pursue aggressively a deal with China, in particular.

But a New Zealand-China free-trade agreement should be reflected in at least equal opportunities across the other side of the Pacific. The lack of a strong economic partnership with the US is the yawning gap in current New Zealand trade policy.

It is ironic that in some cases China is already offering better access for New Zealand exports than the US, and is prepared to offer more.

New Zealand must continue to pursue free-trade agreements with key partners. But we need to be clear that they are a second-best solution, piecemeal, unstable, potentially divisive and even cancerous unless overlain by strong global rules.

The first best solution remains the WTO. This year we have the best opportunity in more than a decade to make progress in multilateral liberalisation through the Doha development round. New Zealand will be pushing as hard as ever. But the key decisions will be taken in Washington, Beijing, Brussels and Tokyo.

Our interest will be in ensuring that the four of them work together and do not allow the changes in trade and financial flows to create a new and damaging divide down the centre of the Pacific.

* Philip Turner is the director (government and trade) for Fonterra. He is responding to Helen Clark's view that New Zealand cannot stand still and see others gain preference through free-trade agreements.