In all things there are the good, the bad and the downright ugly. Today, Matthew Tukaki, Editor in Chief of EntreHub.org takes a look at why the TPP is good for New Zealand business and why so many others in the community remain concerned. Is there truth to the positive implications of the TPP and what about the provisions as they relate to investor state relations?
With the Trans Pacific Partnership (TPP) signing ceremony just around the corner in Auckland (New Zealand) we wanted to take a closer look at some of the claims being made that it is a good deal. Firstly you have to look at the deal through a series of different lenses because not everything is what it seems. For example, it is correct that in the case of New Zealand tariffs will be eliminated on over 93% of that country’s exports to TPP countries that New Zealand doesn’t have a current free trade agreement with but, only once the agreement has been fully phased in and again while the calculated amount of eliminated tariffs will be $259 million (NZD) per year those savings will not be fully realised until full implementation. New Zealand, by default, will (once signed) have, in effect, free trade agreements with both the United States and Japan as well as with Canada and Mexico – each of those economies are in the world’s twenty largest groupings. Then there will be the elimination of tariffs on exports to Vietnam and Malaysia which include wine and liquid milk.
"Tariff: a tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. A specific tariff is levied as a fixed fee based on the type of items value (e.g., 10% of the car’s value). Tariffs provide for additional revenue for governments and domestic producers at the expense of consumers and foreign producers."
So the first thing that stacks up is yes, over time the lowering of tariffs will see a significant saving to New Zealand exporters but as to whether this will lead to additional job creation you need to look at where the export growth will be. At the moment New Zealand exports to TPP countries for beef stood at $1.5 billion and sheep meat at $449.6 million. Now, this is key, because by way of the US being a signatory all tariffs to that country will be eliminated over five years saving exporters around $10.8 million. But, when it comes to Japan it will take 15 years for them to reduce tariffs for the importation of New Zealand beef from a 38.6% tariff to 9%. In other words over five years tariffs to the US will be gone but in Japan after 16 years it will still be up to 9%. It’s the Dairy industry that comes out on top again thanks to the US being party to the agreement where all tariffs for milk powder and infant formula will be removed. To get a handle on what that means you need to look at data by Statista that estimated the baby food market in total was worth $7 billion USD in 2015 and $50 billion USD globally.
Then there is the wine sector where the export market is currently worth $839 million to countries within the TPP region and again we look at the US market as an example where phased removal of tariffs will come into force both immediately (for bottled still wine) and then bulk wine over a period of three years. Essentially whatever sector you look at there are phased tariff removals and that leads to cost savings.
Now, let’s take a look at job creation as another primary argument as to whether or not the TPP works in favour of New Zealand. There is truth to this argument because by default as tariffs are removed and demand for exports picks up then the need to employ more people to meet demand becomes obvious.
But, the jobs being created will not only be in the production process or at the farm gate. There will be a need for more business development and sales managers, export managers and sales people, administration staff, marketing and public relations staff and so the list goes on. There will of course be the need to employ more people in the production process for a good from wine makers to farm workers, from fisheries staff to public policy people. The reality is why there is a lot of truth into the fact that the TPP over time will stimulate jobs growth just how many jobs and what the net impact to the economy will be is yet to be determined. What we can do is look at what the implications of the China FTA has been to get some indication but that data is still a couple of years off.
It’s in the small business arena that things could really take off. Where once tariffs on exports were an inhibitor for many in small business to explore new markets all of sudden they become more viable. Take for example a small family owned wine business or cheese maker who otherwise would have paid a high tariff rate to the United States (for cheese) or the makers of protein makers who otherwise would have fond it too costly to export to Japan and Canada – the removal of tariffs can lead to growth. This in turn enables the business to grow and, therefore, hire more staff.
The challenge for small business is ensuring they know enough of FTA’s and how they work more generally to enable them to take advantage of the opportunities. That means Government will need to invest a lot more into gearing small business for export growth and that also means ensuring that staff of our New Zealand’s overseas missions understand how to grow and nurture small business in TPP countries. At the moment some would argue that the focus is on the big end of town. Of course Maori economic development goes hand in hand with business growth more generally and there will be opportunities, just as there are with all other sectors, to take advantage of the TPP. Whether or not Maori business is geared to the opportunity is another question entirely. A recent report by the World Bank indicated that the New Zealand economy would be 3% bigger as a result of the TPP. In fact, using that report as a benchmark New Zealand is in the top five countries that will experience the most positive impact. Australia is at the bottom of the pile barely even rating a mention.
Community, legal and business concerns
So, there is logic in the TPP having significant advantages for New Zealand business and industry but that doesn’t alleviate the concern many in the community have about other potential implications of the TPP. On that front we return to some of the concerns Australia’s Chief Justice had in 2014. Justice French told a Supreme and Federal Courts Conference in Darwin that:
“Arbitral tribunals set up under ISDS provisions are not courts. Nor are they required to act like courts. Yet their decisions may include awards which significantly impact on national economies and on regulatory systems within nation states. Questions have been raised about the consistency2 , openness and impartiality of decisions made in ISDS arbitrations. A briefing paper prepared by the European Parliamentary Research Service in January 20143 pointed to a number of concerns raised by a range of observers which include:
vague formulation of major treaty provisions leaving a wide range of interpretations open to arbitrators;
loopholes which enable abuses such as nationality shopping by companies which create subsidiaries abroad specifically to take advantage of the agreements;
lack of transparency with varying degrees of secrecy attaching to arbitral processes depending upon the institutions or rules which are applied;
a relatively small pool of arbitrators — arbitrators appointed to ISDS arbitrations are said to be mostly male (95%) and from Europe and North America;
role-swapping by arbitrators who appear from time to time as counsel in ISDS cases;
the high cost of ISDS arbitrations — estimated by OECD as averaging about $8 million each;
associated with the high cost and potentially high awards, a growing phenomenon of third party funding of claims by banks, hedge funds and insurance companies in exchange for a share of the proceeds ranging from 20% to 50%; • absence of effective review or appeal processes;
inconsistency in decisions on similar provisions
Those concerns are reflected in an enormous body of literature on the topic of ISDS. Before considering that process further, it is useful to get some idea of the number of agreements and of investment disputes in which it is applied.”
And the Chief Justice is right to be concerned because these provisions have not exactly been fully explained by any parties to the agreement. In October of 2015 economists Joseph Stiglitz and Adam S Hersh also questioned the ISDS saying "investors — wherever they call home — deserve protection from expropriation or discriminatory regulations. But ISDS goes much further: The obligation to compensate investors for losses of expected profits can and has been applied even where rules are non-discriminatory and profits are made from causing public harm. ... Imagine what would have happened if these provisions had been in place when the lethal effects of asbestos were discovered. Rather than shutting down manufacturers and forcing them to compensate those who had been harmed, under ISDS, governments would have had to pay the manufacturers not to kill their citizens. Taxpayers would have been hit twice — first to pay for the health damage caused by asbestos, and then to compensate manufacturers for their lost profits when the government stepped in to regulate a dangerous product."
And it’s the implications of these provisions that have caused a nervous and defensive reaction by many in the community – mainly because the politicians appear unable to offer up credible responses to alleviate community concern.
After all is said and down there are obvious benefits of the TPP to New Zealand but the concerns around ISDS and many other related provisions such as pharma, trade marking and IP need to be settled if the populous are to embrace it.
The reality is only time will tell but what needs to be considered is whether or not New Zealand will lose its ability to make sovereign decisions and until the ISDS provisions are sorted out and made crystal clear we just won’t know.
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