Abstract
When President George W. Bush received ‘fast-track’ trade promotion authority (TPA) in 2002 which, in essence, gives him much greater power to pursue trade negotiations, many economists looked with interest to see where this power would be applied. One optimistic perspective on recent US trade policy is that TPA was purchased at the considerable cost of US steel tariffs and the bloated Farm Bill – necessary quos for the quid of domestic political support for TPA – so it must be highly valued by the Bush administration and therefore would be used extensively and wisely to promote trade agreements. The particular hope of many economists was that it would signal a renewed US commitment to multilateralism and decreased emphasis on preferential trading deals. This was especially the hope in New Zealand (NZ), an exporter of products in the world’s most protected sector, agriculture, and a miniscule one at that, with little power in bilateral settings.
While it is perhaps too early to assess the US commitment to multilateralism – a less optimistic view of the steel tariffs and Farm Bill is that they represent a total capitulation of US international economic interests to domestic political interests – it does seem that the TPA has triggered a rash of negotiations for bilateral preferential trading arrangements. So the US is in the final stages of preparing a deal with Singapore, another with Chile is the first of a planned series of dominoes in South America. The US Trade Representative (USTR) has also notified Congress of its intentions to open negotiations with the countries of the South African Customs Union (Botswana, Lesotho, Namibia, South Africa and Swaziland), with those of the Central American Integration System (Costa Rico, El Salvador, Nicaragua, Honduras and Guatemala) and with Morocco.
From a NZ perspective perhaps the most significant deal the US has indicated it will start to negotiate is that with Australia. The significance of this lies not just in its immediate impact on NZ, as an exporter competing with Australia in many markets and product lines, but also in its impacts on the dynamic political economy of NZ’s own trade relations. Given the close economic relations between Australia and NZ, as represented by the eponymous free trade area Closer Economic Relations, would a US-Australia deal make the addition of NZ a fairly straightforward step? Would it be easier, in fact, than creating a US-NZ deal directly in that the major barrier to such a deal is very likely the US farm lobby and that would have to have been overcome for a US-Australia deal to go ahead? Or would it make a US-NZ deal more difficult – would the US farm lobby draw the line at favourable treatment for even more efficient farmers or would Australian interests oppose the inclusion of competing NZ farmers in a deal giving preferential access to US markets?
Great interest was stimulated in NZ in November 2002 when the US Trade Representative, Robert Zoellick, notified Congress of his office’s intention to initiate negotiations with Australia, as required by the US Trade Act. The interest came from the following two sentences at the close of the 7-page letter: “Given the integration of the economies of Australia and New Zealand, New Zealand has been advocating its case to the Administration, as well as to Congress, that an FTA with New Zealand would complement our FTAs with Singapore and Australia. We will be soliciting the views of the Congress on this matter as we move forward with the Australia FTA.” (USTR 2002, p.7.) While one can hardly conclude from this that a US-NZ FTA is imminent, nevertheless the possibility has at least been raised and it reinforces the potential significance of the questions raised above.
While we do not purport to answer these questions in this paper, they do provide some of the rationale for the exercises we do conduct here. We evaluate US-Australia, US-New Zealand and US-Australia-New Zealand free trade agreements using computable general equilibrium modelling. The comparative statics exercise we consider involves removing import tariffs, export subsidies (both positive and negative) and transport costs on trade in all commodities between nations in the free trade area. Hence our calculations are likely to represent the upper limit of changes due to the proposed trade agreements.