Beijing Ka-Ching! An Analysis of the FTA

Beijing Ka-Ching! An Analysis of the FTA

By Gordon Campbell

Image by Lyndon Hood*****

Politically, the NZ/China Free Trade Agreement has joined the National Party, corporate New Zealand and the media in the same cheering squad for a Government initiative. Mighty rare, and a political triumph by any definition. Yet until the business is done and we know its value and we see how the FTA mechanisms work in practice, who knows? There is room for some healthy scepticism about the size of the bounty – Colin Peacock on Mediawatch ran an amusing item on the wildly varying dollar estimates being touted – and the terms of the deal.

One of the interesting things about the China FTA is the evidence that our negotiators have learned something from their naivete during the 1990s – when Tim Groser and Lockwood Smith were running the show – and have really tried this time to build in safeguards against China, particularly within investment rules. Investment rules are always a key area, and one thing that can really clear the room of mutual goodwill is the meaning given to the term `expropriation.’

Expropriation, in international trade law, can mean almost anything that makes an investor feel bad. Not even as bad as the Canadian Pension fund are feeling right now, over Auckland airport. It may help to think of a foreign investment as a cup of coffee. If a government confiscates your coffee, that’s expropriation, so sue them. Suppose the government just spills your cup. That’s expropriation, too. And if the government took away your cup of coffee for a while and brought it back later but your coffee had got a bit cold, then that’s indirect expropriation, and you can sue for your lost enjoyment and profit. Because you, as the boss of Shanghai Transglobal, want foreign investment to be just the way you like it.

Back in the 1990s, the infamous MAI treaty – cheered on by Lockwood Smith and his National Party colleagues in government – tried to give exactly that kind of power and security to multinational corporations. The MAI took concepts of property rights and the takings thereof enshrined in the US constitution and sought to impose them on countries ( Canada, New Zealand etc ) that had traditionally given governments much greater latitude about invoking the public good with respect to property, or in this case investor, rights.

In particular, the MAI sought to bind democratic countries for up to 20 years into draconian investment and expropriation rules. In the event of disputes, an un-elected tribunal of trade experts in Geneva would have the power to pass binding judgments on nation states. Even under Nafta – which was the first international treaty to give multinationals the power to sue sovereign nations directly – Canada soon found itself unable to stop or restrict the Ethyl Corporation from exposing Canadians to a toxic fuel additive because that would amount to …you guessed it, expropriation.

Which explains why New Zealand has tried so hard in the China FTA to put a high fence round `expropriation.’ Look at annex 13, which goes into bat against the old, MAI style dangers. Annex 13 says expropriation can be either direct or indirect and the second kind occurs when a state “deprives the investor in substance of the use of the investor’s property.’ To qualify for redress under the FTA though, the annex goes on to say, this deprivation must be either severe or indefinite, and would qualify only if it was discriminatory, and in breach of existing written agreements or contracts. Crucially, it says the measures taken by the state to reasonably protect public welfare, health, safety and the environment would not qualify as indirect expropriation.

China signed it. Will such clauses stand up in future to the full blast of international trade law scrutiny? Only time will tell, but at least New Zealand no longer seems to be feeling duty bound to sacrifice and sign away its own best interests on the altar of free trade.

CHINA currently has, by my count, eight existing free trade agreements and is negotiating, or re-negotiating about 15 more. It has been touching to see how New Zealand has rejoioced in the distinction that it is the first developed country to sign such a deal with China, but trade is not romantic – China may, or may not, remember her first time.

Last Sunday for instance, China signed an expanded deal with Chile opening up 23 sectors of the Chinese economy including computers, management, consulting, mining, sports, environment and air transport, while including 37 sectors of the Chilean economy including legal services, engineering and real estate. On the same day, China announced substantial progress on expanding its existing $US7 billion bilateral trade with Pakistan to a projected $15 billion behometh.

Meaning : the New Zealand deal is a minnow in China’s calculations, and any window of advantage in China trade for our exporters will have closed significantly before this decade ends, let alone by the time China lifts the tariff gates on Fonterra in 2019. Three years before then, our tariffs on Chinese carpets, clothing and shoes will have been wound back to zero.

Foreign tariffs are of course, only one hurdle facing our manufacturers and exporters. Many have found the fluctations in the dollar to be far more troubling. In the case of China, it is not as if our exporters pay the tariffs anyway – they are paid by the Chinese importer, who will retain some discretion on how much of these FTA tariff cuts flow back to New Zealand.

What do we get ? One third of our exports will become duty free by year’s end, the next third within five years and 96 % of our products will becometariff free in just over ten year’s time. What was in it for China? Well, the treasure was in not the tariff part of the deal, that’s for sure. China already enjoys a whopping trade surplus with New Zealand, which this deal with do little to arrest, let alone to roll it back.

No, the real prize for China would have been those 1,800 skilled Chinese workers and the 1,000 skilled young Chinese a year able to enter New Zealand on working holidays. That’s where our status as a ” developed” country will kick in – to China’s benefit, not ours. Because China will be now be seeking to extrapolate those figures upwards in every other developed country – starting with Australia – into very significant numbers, based on what we, with our tiny population, were willing to concede. In Europe, that could be worth 100,000 – 150,000 people. So any brownie points we get from China by setting this baseline may have to be weighed against the teeth gnashing everywhere else.
There may be some teeth gnashing closer to home as well. Remember last year, those embarrassing scandals over China’s products – including the lead in toys made in Chinese factories, and the toxic chemical residues found in some of their food exports? Well, if you read the chapter seven phyto-sanitary part of the FTA there’s a clear intention not to allow those sort of concerns to unduly interrupt the flows of trade.

For starters, the FTA seeks to bring the risk analysts and experts from both countries into contact “so as to strengthen communication and understanding of each other’s working procedures, applied methods and criteria.”

You know how bureaucrats think. Trade requires trust. Trust fosters confidence. Confidence leads to a sense of equivalence. Equivalence means our standards are basically the same. But are they? “To speed up the risk analysis process, good working relationships established between the Parties and their trust in each other’s sanitary and phytosanitary system shall be taken into account.” Umm, just so long as that trust is well grounded, right?

Lets see:

“The importing Party shall accept the sanitary and phytosanitary measures of the exporting Party as equivalent if the exporting Party objectively demonstrates that its measures achieve the importing Party’s appropriate level of sanitary and phytosanitary protection.”

Oh, right, they’re to be taken as being the same if they “objectively demonstrate” that they are, and we know just how good those guided tours can be. And if we have any residual quibbles, we will need to show the reason why : “To facilitate a determination of equivalence, a Party shall on request advise the other Party of the objective of any relevant sanitary or phytosanitary measures.”

In sum, the process begins with getting border control in both countries to know, trust, understand and ( we live in hope) improve each other’s systems – mainly in order to speed up the trade flows. The system is geared towards facilitating consensus and obviously, the crunch will come if China says it has “objectively” demonstrated that its measures have met our demands, and we disagree. In which case, we will need to be able to justify our concerns – or those of the USFDA, if they happen to the first to blow the whistle. At the very least, the process works against precautionary discretion.

It is also a balancing act. If our border security had a mandate and the resources to make safety – and not the flow of trade – their top priority, the system might even work really well, and lift all of the boats. What China is looking for here though is a potential ally, to help get its products back onto global markets with a rubber stamp of approval from New Zealand – that first, highly prized developed country to sign up with them.

So where do tests on potentially risky imports enter the frame ? Lets see:

“They shall be carried out in a manner that is least trade-restrictive, and without undue delay. The frequencies of import checks on such importations shall be made available on request. The importing Party shall notify the other Party in a timely manner of any amendment to the frequency of import checks in the event of change in the import risk. On request, an explanation regarding amendments shall be given, or consultations shall be undertaken. ”

Again, hardly a process that welcomes, or enables, much in the way of random checks. Is this a useful regime to stop either party using phyto-sanitary checks as a hidden trade barrier, or is it a system designed to inhibit the sort of testing able to detect problematic imports? Once again, it will be interesting to see how China invokes the NZ/China FTA in its phtyo-sanitary dealings with other developed countries.

FINALLY, lets talk money. In very first sentence, the FTA says this : “The NZ-China FTA provides for the removal over time of tariffs on 96% of New Zealand exports: New Zealand will make an annual duty saving of $115.5 million, based on current trade. ” That’s what the duty saving is worth – and all the alleged amounts above that are all up to the exporters.
Scoop wishes them the very best of luck.


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