bilaterals.org | Submission on the Transpacific Strategic Economic Partnership Agreement 2005

Foreign Control Watchdog 111, New Zealand

April 2006

Submission On The Transpacific Strategic Economic Partnership Agreement 2005

Jane Kelsey, Faculty of Law, University of Auckland

[Jane Kelsey presented this submission to the Foreign Affairs, Defence and Trade Committee on February 2, 2006. Ed.]

Preliminary Statement

1. The Trans-Pacific Strategic Economic Partnership Agreement* (hereafter called the P4) is the latest attempt to bind the policy options of present and future New Zealand governments to a global liberalisation agenda that is facing a crisis. The belief that signing more agreements can breathe life into this agenda, and avoid addressing the reasons for its breakdown, is simplistic, naïve and misguided. *The P4 countries are: New Zealand, Chile, Singapore and Brunei. Ed.

2. There are three primary reasons why global trade and investment liberalisation has lost momentum:

(i) Empirical evidence now confirms the predictions of critics who warned that poorer countries, and poorer people within richer countries, would not secure the promised gains from the World Trade Organisation and WTO-related agreements. Even the World Bank’s latest research concedes that predictions of substantial poverty reduction from the Doha Round were based on a “fanciful scenario”; its revisions suggest that even big cuts in tariffs and subsidies would benefit less than 1% of the world’s people living below the poverty line.

(ii) “Trade” agreements now extend far beyond the traditional realm of international trade in goods and restrict the choice of laws and policies that are available to governments to regulate international investment, provision of services, government procurement and intellectual property. The standard assertion that governments retain the right to regulate in the national interest is a rhetorical deceit, as governments no longer have the right to choose the ways in which they regulate. Indeed, the overriding objective and function of these agreements is to restrict the “behind the border” policy choices available to all signatory governments. This includes tying their hands when they face recessions, infrastructure collapse following privatisations, political unrest, social distress or other situations exacerbated by market failure. Governments and their citizens are increasingly resistant to this closure of policy space, especially in services, investment and government procurement.

(iii) The major Western powers, led by the US and European Union, the new power brokers of India and Brazil, and the sleeping giant of China are mercantilists, not free traders. Their strategy at the multilateral, regional and bilateral levels unashamedly promotes their corporations’ interests while defending their domestic economic, social and political constituencies. This is a million miles from the pure neo-classical approach that New Zealand advocates and has adopted unilaterally. Even fellow travelling neo-liberal governments, such as Singapore and Chile, protect their domestic interests, as the P4 shows. New Zealand’s quest to negotiate further agreements that will lock us into progressively more extreme levels of liberalisation leaves us vulnerable in a grossly unequal global economy and eliminates many of our options to respond to the challenges that confront us.

3. Because of their significance, the decision to commence negotiations should be based on a rigorous empirical analysis of the potential costs and benefits, which is subjected to an independent and contestable process. This should include both qualitative and quantitative data. Instead, the Ministry of Foreign Affairs and Trade (MFAT) creates an illusion of positive returns to New Zealand through econometric* calculations that are premised on unrealistic assumptions combined with predictions based on neoclassical trade theory. They ignore statistical evidence of how existing agreements have impacted negatively on the New Zealand economy, such as the growing trade imbalance with Singapore following the signing of the Singapore New Zealand Closer Economic Partnership (CEP) or New Zealand’s chronic balance of payments deficit. The Select Committee and the Parliament should not accept this. *Econometrics - the branch of economics concerned with the use of mathematical methods (especially statistics) in describing economic systems. Oxford Compact English Dictionary. Ed.

4. This process of international treaty making by the Executive is gradually reshaping the nature of national governance in New Zealand. These agreements alter and/or entrench national legislation and policies and are enforceable through extra-territorial legal forums and sanctions. They have a constitutional status that warrants significantly greater scrutiny than ordinary domestic policy and legislation. Instead, the Ministry of Foreign Affairs and Trade consults selectively, within the parameters of the Executive’s prior decision to proceed with the negotiations.

5. There is no accountability or genuine debate. The National Impact Analysis (NIA) that is mandated under Standing Order 384 consistently provides a partisan ideological endorsement by the Government agency that has been the main advocate and negotiator of the agreement, after the negotiations have been concluded. It is utterly uncritical of the results of the negotiation. As a result, I believe that few MPs, including members of this Select Committee, fully understand the substance or implications of these agreements.

6. The process of inbuilt reviews and negotiation of “unfinished business” takes place in even greater secrecy, even though these can extend the substantive coverage of the agreement in very significant ways.

7. Despite a recent Private Member’s Bill and submissions to the Standing Orders Committee of the House urging changes to this process, Parliamentary and Select Committee scrutiny in New Zealand remains a cosmetic and redundant exercise. That was graphically confirmed when the government ratified the Thailand New Zealand CEP before the Select Committee’s report on the examination had been completed.

8. I urge the Select Committee to initiate a genuinely open, independent and properly resourced inquiry into the implications for New Zealand of continuing to pursue the globalisation of neoliberal policies through such agreements, of the kind that the Australian Joint Standing Committee on Treaties has conducted on a number of occasions. At the least, this would allow the robustness of the claims made by the advocates of these agreements to be properly, independently and publicly tested. It would also increase awareness among politicians, other government agencies, the media, business and the general public of the implications of such agreements.

9. For the above reasons and because many of the legal issues are the same, this submission will not repeat my detailed analysis of the Singapore/New Zealand CEP and should be read cumulatively with that submission. Jane’s detailed analysis of the Singapore/NZ CEP can be read online at www.arena.org.nz. Ed.

B. Key Issues Relating To The TransPacific CEP

10. This submission evaluates four key objectives of the P4 identified in the National Interest Analysis, with reference to Chile:

(i) Improving economic returns from merchandise trade;
(ii) Opportunities in the services and government procurement;
(iii) Prospects for strategic cooperation;
(iv) Foundations for an Asia Pacific Economic Cooperation (APEC) wide agreement.

(i) The P4 will provide improved economic returns to New Zealand by reducing trade barriers and enhancing productivity through competition.

11. The arguments offered to support that claim are confused and contradictory, creating an unwarranted expectation of positive returns.

12. The NIA concedes that the levels of merchandise trade with Chile (and Brunei) are small and the applied tariff levels have a minimal impact (euphemistically described as “not trade prohibitive”).

13. It is asserted that removing Chile’s applied 6% tariffs will both boost New Zealand’s merchandise trade with Chile and increase profit margins for New Zealand exporters by “saving” the full duties previously paid. This is contradictory. The usual assumption for modelling static gains from trade is that competition within Chile would ensure that its domestic prices would reduce to reflect the removal of a tariff. Therefore New Zealand exporters would not see any gains in their profit margins, though they may increase their sales if the tariff was significant enough. With a preferential trade agreement such as this, depending on the competitive situation within Chile for each product, there is more likely to be a mixture of increase in profit margin and increase in sales, both of them very small. The stated “savings” in duties are unlikely to be realised, and any increase in sales is purely speculative. Proper analysis of the complexities of this situation is replaced with unrealistic assertion.

14. It is worth noting that if the New Zealand government indeed believes, as implied here, that lowering tariffs benefits the profit margins of offshore importers rather than lowering prices to New Zealand consumers, then the removal of New Zealand’s tariffs over the last 20 years should be reviewed immediately. The contradictory nature of the analysis is highlighted by the claims that on one hand New Zealand exporters will take the full gain of removing Chilean duties through higher profit margins whereas on the other hand New Zealand consumers will take the gain of removing New Zealand duties through lower prices.

15. Elsewhere, however, “dynamic productivity gains resulting from improvements in competitiveness” are expected as New Zealand exports receive similar preferences to other countries that have free trade agreements (FTAs) with Chile. This assumes that New Zealand products are directly competing with products from those other countries, that they receive equal treatment on key products and (contrary to the previous paragraph) that the benefits of tariff cuts are passed on to Chilean consumers.

16. The NIA acknowledges that New Zealand’s merchandise trade with Chile has fallen in recent years as Chile has become a net exporter of dairy products. New Zealand companies, notably Fonterra, have been instrumental in this development. Tariff cuts are unlikely to change this, especially as Chile has sought to protect its domestic dairy interests to some degree.

17. Instead, this trend can be expected to intensify under the P4. New Zealand’s expansion into Latin America using Chile as a platform is likely to involve regional strategies of the kind Fonterra has with Nestle, where they aim to dominate the milk market in Latin America. The investment interests of Fonterra should not be conflated with the export and economic interests of New Zealand. Even without the shares being fully tradeable, the potential for foreign control through the concentration of corporate farm ownership and the primacy of global strategy over local farmers’ interests is very real.

18. The prospect of compensatory gains through new export markets in specialist equipment and services related to primary production appear comparatively small.

19. These overly optimistic projections should be counter-posed with the sobering reality of New Zealand’s burgeoning trade and balance of payments deficits, which have deteriorated with the removal of tariffs, our increased import dependency and the outflow of profits to foreign direct investors. The trade deficit for the October 2005 year of $6.12 billion was the worst on record. The chronic deficit in the current account of the balance of payments stood at 8.5% of Gross Domestic Product (GDP) for the September 2005 year and is predicted to rise.

20. More specifically, in the first three years of the Singapore New Zealand CEP our exports declined by 37% (NZ$180 million) and the trade deficit with Singapore grew from $24 million to $323 million. This stark fact is ignored in the NIA, which euphemistically suggests that the P4 will “reinvigorate our trading relationship with Singapore” and by implication redress this growing trade deficit. How?

21. It is time for the advocates of the global liberalisation strategy to concede that the unilateral and partially reciprocal liberalisation is not working and review the “international connectedness dimension” of the Growth and Innovation Framework which provides the premise for these agreements.

(ii) New opportunities and greater transparency for New Zealand firms in services and government procurement

22. By far the most significant element of the P4 is the services chapter. Predictably, the NIA focuses on the projected gains to New Zealand firms and ignores the domestic policy ramifications of the commitments being made. I seriously question the former, but dealt with these arguments in depth in my submission on the Singapore NZ CEP. I have chosen to concentrate here on the domestic ramifications because MFAT seems unwilling to do address them.

23. The P4 uses a “negative list” approach where the only sectors excluded from coverage of the rules must be explicitly listed in one of two Annexes. Annex III applies a “standstill and rollback” rule, where the right to maintain current measures in specific sectors is preserved, but must not be exceeded and is expected to be further liberalised. It includes a “ratchet” mechanism, whereby any liberalisation is automatically locked in and becomes the new maximum permitted. Annex IV lists sectors where the Government reserves the right to regulate.

24. The adoption of the negative list is unprecedented for New Zealand, except for the longstanding and unique Closer Economic Relations (CER) Agreement with Australia. However, it is likely to be used by the New Zealand government as a new threshold for future services negotiations. It therefore seems inconceivable to me that the NIA did not spell out the associated risks. These commitments will still apply, for example if

(i) The Government has made a mistake and failed to list a sector that should have been included;

(ii) Another party to the P4 alleges, and the disputes mechanisms agrees, that the Government has made commitments that it insists it never intended to make (as occurred recently in the WTO with the US on Internet gambling);

(iii) New technologies alter the way services are delivered and hence the implications of these commitments;

(iv) New policy settings change the meaning or effect of the schedule;

(v) Market failures require the Government to re-regulate services that are not listed in the schedules; or

(vi) A new Government is elected with a policy that it cannot implement because a previous Government has signed away the right to do so.

25. Likewise, the NIA fails to point out that the ratchet allows a radical liberalising government of the kind New Zealand experienced in the early 1990s to effectively negate the reservations in Annex III by introducing policies that no future government could reverse. Instead, it remarks that New Zealand will automatically receive the benefit of any future unilateral liberalisation undertaken by the other parties, then notes: “Of course the mechanism also works the other way; but as a relatively more open country than many of our trading partners New Zealand is likely to benefit from this provision”.

26. Compounding this, there are worrying ambiguities in New Zealand’s reservations, especially in Annex IV. The Government has reserved the right to adopt or maintain any measure with respect to services including “public education, public housing, public transport, public utilities”, “to the extent that they are social services established for a public purpose”. It is impossible to define what “public” and “public purpose” means in a social policy environment where commercial and public purposes are inextricably intertwined and where public and private providers overlap and are sometimes indistinguishable.

27. Likewise, it is not clear whether “public utilities” would include environmental services such as rubbish dumps or sanitation facilities; there is no specific reservation relating to these, whereas there is for drinking water.

28. Article 12.10 further restricts the choices of governments in domestic regulation of qualification requirements and procedures, technical standards and licensing requirements. These disciplines significantly exceed the comparable provisions in Article VI of the General Agreement on Trade in Services (GATS), because they apply to all services unless the right to regulate that aspect of a particular service has been specifically listed in either Annex III or IV. This could have significant implications, given recent negative experiences with light-handed regulation of services such as construction, taxis and private education providers.

29. Currently the P4 applies to “national treatment”, but not market access. National treatment restricts the right of the New Zealand government to treat foreign investors or suppliers of a service less favourably than local suppliers of a like service. No future government that is elected with a policy of supporting local providers of a service would be allowed to implement that policy if that service sub-sector is not listed in the Annexes.

30. Subsidies for services are explicitly excluded from coverage of the P4. This provides some leeway to restrict foreign services providers from full accessing to public subsidies. However, this only affects new commitments that go beyond New Zealand’s existing GATS schedule, for which no similar reservation was made.

31. National treatment also aims to remove restrictions on the right of foreign services suppliers to “establish a commercial presence” - essentially foreign direct investment (FDI). As the NIA observes, there is no investment chapter in the P4 but the services chapter effectively provides an investment agreement in relation to services.

32. The New Zealand government has listed as a reservation in Annex III the foreign investment rules as they are set out in the Overseas Investment Act 1973, the Fisheries Act 1996, the Overseas Investment Regulations 1996 and the Overseas Investment Act 2005. This specifies the general thresholds at which foreign investors have to apply for approval, as an equity value of 25% of an entity or an investment valued at $100 million (the previous level of $50 million was already locked in under the agreement with Singapore). This means the triggers for requiring foreign investments to seek approval cannot be tightened in the future. Likewise, the kinds of investments to which special restrictions apply cannot be extended beyond land and fishing quotas.

33. The “ratchet” mechanism means any further liberalisation of the value or equity threshold or removal of restrictions on certain kinds of land or fishing quotas will automatically be locked in. In other words, if one New Zealand government adopts a completely laissez faire approach to foreign investment and removes some or more of these requirements, a subsequent government could not reinstate even the existing level of restrictions.

34. The only flexibility maintained by New Zealand in Annex IV in relation to FDI is the right to designate the criteria that will be applied to those foreign investors who are required to apply for approval under the Annex III reservations. If very few foreign investors are required to apply for permission, this reservation becomes largely meaningless.

35. The long-term implications of this are very serious. The outflow of profits to foreign direct investors and their lack of commitment to New Zealand’s economic, social and logistical infrastructure has repeatedly required re-regulation and even the resumption of ownership by Government. This Government’s failure to protect the right to choose how to regulate foreign investment is in stark contrast to the more cautious approach of the Chile and Singapore governments. In particular, Chile has reserved the right to restrict capital movements so as to limit the potential for destabilising speculation.

36. This also has balance of payments implications. As the Finance Minister, Michael Cullen, observed in the 2005 Budget, our heavy dependency on foreign capital means that a substantial proportion of our national income is reclaimed by foreigners and taken out of the country with limited reinvestment and minimal evidence of genuine technology transfer.

37. Should a party to the P4 lodge a dispute over any of the above issue relating to services, the right of New Zealand governments to regulate that service in a manner of their choice would be determined by an international arbitration panel of experts in trade law.

38. The absence of an investment chapter per se in the P4 is welcome, as it limits the potential for investor-initiated disputes that is a feature of the CEP with Singapore. It also avoids the inclusion of the dangerous expropriation provisions that were included in the Investment Promotion and Protection Agreement [IPPA] with Chile that was signed in 1999 but never brought into effect. However, the future status of that IPPA remains unclear. When I spoke with the Chilean negotiators about this in 2004, they indicated that Chile had decided to adopt a moratorium on further investment agreements. The NIA is silent on the matter.

39. The Government Procurement chapter 11 raises similar risks to the services provisions. The small number of services which are not covered, according to Annex 11A, involve the procurement of “public health, education and welfare services”. The footnote defines these with reference to GATS sectoral headings “Education Services”, “Health and Related Social Services” and administration of compulsory social security schemes. Yet, as MFAT is well aware, many key aspects of what would ordinarily be considered “public education, health and welfare” fall outside those headings. The terminology is also different from that used in the services schedule, which compounds the potential for uncertainty and dispute.

40. Despite exclusion of “research and development services” in Annex 11A this presumably remains subject to the commitments previously made in the Singapore CEP that cover research and development in natural sciences and engineering, social sciences and humanities in tertiary institutions, economic and behavioural research, environmental sciences and interdisciplinary research.

41. New Zealand is the only party that has bound itself in the P4 to a system of open tendering for procurement by central government.

42. Although the Government has not subjected local government procurement to the agreement under Annex 11, the rule against discriminating in favour of any local enterprise (Article 11.4.3) appears to apply whether or not the good or service or the procurement agent is listed in the Annex. This would severely limit the options for developing a Buy New Zealand strategy that includes any element of procurement at the central government level.

43. Given the controversies that have emerged in other countries over public private partnerships, build operate and transfer projects and public works concessions, it is very worrying that they are explicitly included in the definitions provision 11.1.1. The combined effect of the services and government procurement chapters will constrain the regulatory options of any future New Zealand government that adopts these approaches.

44. I would like to have said much more in this submission about the implications of the services and government procurement provisions, but there seems to be little point. I simply reiterate the importance of a full and independent inquiry into the Government’s trade liberalisation strategy that will allow these questions to be fully addressed.

(iii) Create a framework for mutually beneficial strategic cooperation

45. The goal of broadening and deepening New Zealand’s relations with Latin America and Asia is laudable. However, a free trade agreement is not the appropriate vehicle through which to do so. There are many other ways to raise New Zealand’s profile and foster dialogue and cooperation - indeed, the framework agreements signed with Chile in 2004 provided such a mechanism.

46. A Strategic Cooperation Commission could provide a useful institutional forum for this. But it would need to reflect a balance of policy objectives, perspectives and participants. To locate a cross-national engagement on culture, education, research and development within the framework of a free trade agreement and its accompanying market-driven ethos is totally inappropriate.

47. Indeed, the neo-liberal framework is viewed by many leading participants in those sectors as the problem that needs to be addressed, rather than the solution.

48. Both the Coalitions for Cultural Diversity in Chile and in New Zealand have been highly critical of the impact of market-driven policies and free trade agreements on their national cultural sector and on genuine international diversity. Both were strongly supportive of the development of a United Nations Educational Scientific and Cultural Organisation (UNESCO) Convention that would provide an international legal instrument to neutralise the effects of trade agreements. However, the New Zealand and Chilean governments opposed the inclusion of a strong provision on trade agreements in the UNESCO Convention. While the P4 provides some protection for cultural policy space beyond that provided in the GATS, New Zealand’s options are still limited by its GATS commitments. Presumably any dialogue will need to take place within those constraints.

49. An even starker contradiction arises between the quest for profit maximisation by transnational firms and protection of workers and the environment.

50. The NIA hailed the New Zealand government’s negotiation of “its first legally binding outcomes on labour and environment”. This was a celebration of form over substance. The Environment Cooperation Agreement requires a consensual agenda and adopts a “best endeavours” approach to resolving an environmental matter that one government party considers sufficiently significant to pursue in the face of opposition from another. It could result, at most, in a report. The “legally binding outcome” on labour is simply a Memorandum of Understanding with provision for consultation.

51. Neither instrument is effective unless the relevant government parties want to cooperate. The weak nature of the instrument suggests that is extremely unlikely.

52. Recent history reinforces that view. Select Committee members will recall the eagerness with which leading New Zealand corporations invested in Chile once restrictions on capital movements were removed in 1985. They were attracted by the receptive policy environment provided by the military dictatorship of General Augusto Pinochet. Fletcher Challenge and Carter Holt Harvey invested in environmentally destructive forestry and pulp and paper operations, benefited from the dispossession of indigenous Mapuche from their lands and took advantage of repressive labour practices to maximise their returns in Chile and break strikes in New Zealand. In 1990 I spent three weeks in Chile studying Fletcher Challenge’s operations and witnessed similar conditions and testimonies to those documented in the TVNZ Frontline programme “The Kiwi Has Landed”.

53. These companies were led by business entrepreneurs who were major influences on the fourth Labour government. They publicly urged the New Zealand government to emulate Chile’s labour laws and these views became a major catalyst for the Employment Contract Act. Their local executives at Tasman Chile were uncooperative in providing information about the company’s operations, which was legally distinct from the New Zealand parent, while executives at Forestry BioBio denied any responsibility for pollution of the local river or workplace deaths and accidents. The New Zealand entrepreneurs denied any responsibility for collaboration with the Pinochet regime. Successive New Zealand governments turned a blind eye to their operations. It seems pretty clear that neither of those governments would have been prepared to initiate complaints against these companies under the labour and environment provisions of the P4.

54. When I returned to Chile in late 2004 delegates from the union for small farmers told me the working conditions in “tree farms” had improved, but they were still well below what we could consider acceptable. The bigger problem involves small farmers who are unable to meet the volume, price and quality requirements that are set by Soprole (Fonterra’s Chilean subsidiary)/Nestle or contracts for export. Faced with massive debt problems, and no assistance from the Government, many are leaving their land or trying to supplement their farm incomes and repay mounting debt with seasonal wage labour. Women especially have become temporary migrants working in fruit and vegetable production, and face major health issues from pesticides, poor nutrition and unhealthy living conditions. None of these workers had pensions or insurance that covered sickness and disability. These are traced directly to the impacts of trade liberalisation, market-driven export production and price competition through minimal labour, health and safety and environment standards. Would the current New Zealand government be able or prepared to intercede on behalf of these workers and communities?

55. It is significant that this strategic cooperation stops short of any agenda item on indigenous peoples. Perhaps that is a good thing.

(iv) To provide a model ‘high quality’ agreement to which other members of APEC will accede.

56. The building block strategy aims to encourage other APEC members to sign onto an ideologically pure model agreement of trade and investment liberalisation and market-driven economic integration. This ignores both the political and technical realities. The growing number of bilateral and sub-regional agreements among APEC members reflects different models for regional capitalism, and the competing power politics and hegemonic aspirations of larger powers in the region. Their coverage and terms are uneven, making integration of the multiplicity of agreements almost impossible. Indeed, if governments tried to implement all the current and proposed agreements they would risk create major social, economic and political conflict. Given these realities, it is not surprising that proposals for a regional FTA have been dismissed at a number of recent APEC meetings. For a more detailed critique of this strategy see “APEC and FTAs” on www.arena.org.nz/apecftas.htm.

57. The New Zealand economy appears headed for a downturn. The Government needs access to a wide range of policy tools. It is reckless to sign away the right of New Zealand governments to adopt a managed approach to trade in goods, services, and foreign investment. It should be protecting its limited policy space to regulate these activities and promote complementary and alternative national economic development strategies.