Report Of
Institute for International Economics
Washington D.C.

THE CASE FOR A MODEL FREE TRADE AGREEMENT
BETWEEN THE UNITED STATES AND NEW ZEALAND

EXECUTIVE SUMMARY

There are strong economic, political and trade policy reasons for the early launch of negotiations to devise a free trade agreement (FTA) between the United States and New Zealand. Such an agreement would presumably be pursued alongside, or together with, an FTA between the United States and Australia since New Zealand and Australia have had their own FTA for almost twenty years and their economies are by now closely integrated.

New Zealand is very small compared with the United States so the economic impact of an FTA would be quite modest for the United States and considerably larger for New Zealand. However, US merchandise exports to New Zealand would rise by about 25 percent and virtually every US sector would benefit. The inclusion of Australia would increase the magnitude of these results substantially; US exports would rise by about $3 billion. The adjustment costs for the United States would be minimal: production in the most impacted sector, dairy products, would decline by only 0.5 percent and any adverse effect on jobs would be very small.

The largest gains, especially for the United States, would come from the strategic benefits of such an FTA with New Zealand. It would help restart and accelerate the momentum of trade liberalization. It would help induce other trading partners to participate effectively in that renewed liberalization process. It would contribute toward the accomplishment of APEC’s goals of achieving “free and open trade and investment in the (Asia Pacific) region by 2010,” with their important political as well as economic implications. By doing so, it would reduce the risk of polarization of the Asia-Pacific region between competing blocs in East Asia and the Americas, a development that would push the world toward a tripolar configuration that could be extremely dangerous in security as well as economic terms.

An FTA with the United States would also tangibly recognize New Zealand’s innovative and sweeping economic reforms of the past two decades, and thus offer incentives for other countries to do likewise. In addition, the excellent record of New Zealand’s (as well as the United States’) prior FTAs suggests that such a bilateral pact could develop creative new ideas to pave the way for broader multilateral agreements, in APEC and especially at the World Trade Organization, on some of the difficult issues that will be on the agenda for their major upcoming negotiations.

There is thus a compelling case for the early launch of negotiations for an FTA between New Zealand and the United States. The government of New Zealand has indicated its strong desire to pursue such a pact. The United States should respond positively and begin the effort as soon as possible.
THE LOGIC OF A UNITED STATES – NEW ZEALAND FTA

Over two hundred free trade agreements (FTAs) have been concluded in recent years or are under negotiation around the globe. These agreements take many forms: bilateral, sub regional and regional. They have become a major device for both reducing trade barriers and fostering closer relations among nations in all parts of the world.

The United States has become an active participant in this process. It negotiated FTAs with Israel and Canada in the 1980s, and with Mexico (to create NAFTA) in the early 1990s. It has recently concluded an FTA with Jordan, engaged in negotiations for a Free Trade Area of the Americas and bilateral agreements with Singapore and Chile, and begun to explore pacts with Central America, South Africa and perhaps others.

New Zealand is also one of the leaders of the FTA dynamic. It concluded a comprehensive Closer Economic Relations Trade Agreement with Australia in the 1980s and recently entered into an FTA with Singapore. It is negotiating actively with Hong Kong and exploring possibilities with several other countries including Chile.

The pursuit of FTAs fits squarely within the overall trade strategy of both the United States and New Zealand. Both countries have consistently been at the forefront of efforts to promote a more open international trading system. Both have been among the strongest supporters of the World Trade Organization and of the Asia Pacific Economic Cooperation forum. Both have, in particular, been leading advocates of the liberalization of agricultural trade.

The two countries share the same hierarchy of priorities in their strategies for promoting trade liberalization. Top priority is given to multilateral steps through the WTO followed by regional liberalization and then bilateral measures:

 The United States, most recently through United States Trade Representative Robert Zoellick, has consistently made clear that it gives the highest priority to successful multilateral trade liberalization through the WTO. New Zealand too has always placed the WTO at the top of its priority list and has demonstrated its commitment by consistently playing a role in WTO affairs far out of proportion to its size. Mike Moore of New Zealand is Director General of the WTO. New Zealanders have recently been or are prominent chairs of WTO committees, ministerial working groups, and negotiating groups. The United States and New Zealand have often worked closely together on liberalizing initiatives in the WTO.

 Both countries have played leading roles in promoting APEC as a mechanism for liberalization in the Asia-Pacific region. The APEC Leaders’ meeting in Seattle in 1993 embraced the vision of free and open trade and investment in the region. As APEC host in 1999, New Zealand introduced a number of new initiatives under the theme of “strengthening markets” as a necessary complement to APEC’s trade and investment objectives, and sought to reinforce the mutual supportiveness of APEC and the WTO.

 In their pursuit of FTAs, both countries have sought agreements that are fully supportive of the regional and multilateral APEC and WTO processes. United States Trade Representative Robert Zoellick recently stated that “these (bilateral) agreements can open up a new front for free trade. They can create models of success that help reformers, break new ground for liberalization in changing or emerging sectors, build friendly coalitions to promote trade objectives in other contexts, add to America's trade leverage globally, underpin links with other nations, and energize and expand the support for trade.” New Zealand has followed the same approach in its own pursuit of bilateral trade agreements. The recently concluded FTA between New Zealand and Singapore, for example, was explicitly conceived as a “model agreement” that could point the way to the use of bilateral agreements to contribute to the wider objective of free trade in the Asia-Pacific region and a more open international trading system. New Zealand Prime Minister Helen Clark, at the signing of the agreement with Singapore, described the new agreement as a “model and comprehensive agreement, which complies fully with WTO requirements and is fully consistent with APEC's goals. New Zealand believes that sub-regional agreements must be supportive of the WTO and the international rules-based trading system. This agreement is, and is an excellent model for others to emulate.”

For both countries, their trading links within the Asia-Pacific region are of the utmost importance. The United States conducts 32 percent of its trade with East Asia compared to 35 percent with its Western Hemisphere trade partners. New Zealand conducts 29 percent of its trade with East Asia and 17 percent with North America. Thus the maintenance of strong trade linkages with East Asia is a major objective for both countries.

The trans-Pacific dimension of Asia-Pacific trade liberalization is also crucially important to both countries, in the United States’ case because of the importance of East Asia in its overall trade, and in New Zealand’s case, because it has vital trade interests on both sides of the Pacific, in East Asia and North America. The need to maintain and strengthen this trans-Pacific dimension has been an important factor behind the support of both countries for APEC.

For both countries, the leading Northeast Asian nations – China, Japan and Korea – occupy an especially vital position in their international relationships. Northeast Asia has long been central to United States security and political as well as economic interests. New Zealand too has long recognized the importance of close relationships with these Northeast Asian countries, and Prime Minister Helen Clark has recently paid high-profile visits to all three.

This report will show that the proposed free trade agreement between the United States and New Zealand will have favorable effects on the trade of both countries. The benefits of free trade between the United States and New Zealand must, however, be seen in the context of the very advanced degree of integration that has already been achieved between New Zealand and Australia. In 1988, the Australian and New Zealand governments committed themselves to establish a “single market” covering the two countries and in the following years the realization of this vision has been largely completed. Thus by negotiating a free trade agreement with New Zealand in parallel with a similar agreement with Australia – or better still, by negotiating a trilateral agreement covering all three countries – the United States will gain open access to this integrated market.

The principal catalyst for this integration has been the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA, usually shortened to CER), which was launched in 1983. Under this agreement all tariffs, quotas and subsidies applying to trade between Australia and New Zealand have been removed. Hence trade in goods between the two countries has been completely free for the last 10 years.

CER was extended to trade in services in 1989. The CER trade in services arrangement protocol provides for free trade in services in all sectors other than a “negative list” of exceptions. This “negative list” has been progressively reduced to the point where the only services for which free trade does not apply are air services and coastal shipping (listed by New Zealand) and air services, broadcasting and television, third party insurance, postal services and coastal shipping (listed by Australia). New services are automatically covered by the free trade provisions. The CER trade in services arrangement provided one of the benchmarks for the Uruguay Round negotiations on services in the WTO.

The CER agreement has in fact been identified by the WTO as a model regional trade agreement that is fully supportive of the multilateral trading system. This is due both to the exceptionally “clean” nature of the agreement and to the fact that both Australia and New Zealand have steadily reduced their most favored nation (MFN) tariffs over the life of the agreement, through a combination of unilateral and multilateral liberalization.

Building on the basic CER agreement, market integration has been developed in a number of further directions. A series of measures has been implemented to remove technical barriers to trade, including a Memorandum of Understanding on Technical Barriers to Trade (1988), an Agreement on Standards, Accreditation and Quality (1990), establishment of the Joint Accreditation System of Australia and New Zealand (JASANZ) for quality accreditation (1991), establishment of Joint Food Standards (1995) together with a joint Australia-New Zealand Food Authority (ANZFA) to develop and oversee food standards, including approval of food produced using gene technology (1995) and an Arrangement on Food Inspection Measures (1997). A Trans Tasman Mutual Recognition Arrangement (TTMRA) ensures that goods which can legally be sold in one country can also be sold in the other, and a person who is registered to practice an occupation in one country is entitled to practice an equivalent occupation in the other (five product areas and one occupational group – medical practitioners – are exempted).

Customs procedures between the two countries have been steadily streamlined and harmonized. Harmonization of quarantine procedures is provided under the 1988 Protocol on the Harmonization of Quarantine Administrative Procedures, and in 1999 a regular senior official Biosecurity Dialogue was established to manage quarantine issues.
Integration of the aviation markets of the two countries has been facilitated by the Australia New Zealand Single Aviation Market Arrangements (1996) and more recently by an Open Skies Agreement (2000).

Government procurement has also been integrated between the two countries; the New Zealand government now participates with Australian federal and state governments in a Government Procurement Agreement. Under this arrangement each country is required to grant equal and national treatment to suppliers from the other country, and New Zealand content is treated as equivalent to Australian content for the purpose of local content preferences maintained by the Australian federal and state governments.

Steps have been taken towards the harmonization of business law, with certain provisions of the competition law of the two countries having already been harmonized. A unique feature of this arrangement is the provision for Australian and New Zealand courts to conduct hearings in each other’s country. There has been coordination of securities law and takeover law, and work is proceeding on coordination of consumer protection law, electronic transactions law, disclosure regimes, cross-border insolvency and intellectual property rights provisions. Since 1994 a Memorandum of Understanding has been in effect between the Australian Securities Commission and the Securities Commission of New Zealand.

The labor and capital markets of Australia and New Zealand are also closely integrated. There is free movement of labor between the two countries under the Trans Tasman Travel Arrangements. Australian and New Zealand citizens are able to move freely between the two countries without any requirement to apply for visas, and are able to take up employment in each other’s country without any work permit requirement or any other restriction.

Australia has not been willing to formally include investment in the CER agreement. Nevertheless, in practice investment flows freely between the two countries. According to New Zealand’s Overseas Investment Commission, Australia is the largest source of foreign direct investment in New Zealand, accounting for 36 percent of the total stock of foreign direct investment.

The “integrated CER market” is a large one. As the accompanying figure shows, the combined GDP of the two CER economies is only a little smaller than the total GDP of the ten Southeast Asian economies that make up ASEAN and is somewhat larger than the economy of Korea. The combined GDP of the two CER economies is over 40 percent of the official GDP of the People’s Republic of China, and over 50 percent larger than the GDP of Taiwan. In 2000, the United States accounted for 19.5 percent of the combined imports of the two CER economies and 10.7 percent of their combined exports.

Looking further ahead, the United States, Australia and New Zealand are each negotiating for – or in New Zealand’s case, has completed negotiations for – a free trade agreement with Singapore. At some future point these agreements, together with any new United States agreements with Australia and New Zealand, could come together in a single free trade area. Such an agreement would bring together three of the western Pacific countries that have been most committed to trade liberalization. It would also give the United States access to a market with a combined GDP larger than that of the ten ASEAN economies.

THE ECONOMIC EFFECTS

A preliminary assessment of the economic effects of free trade between the United States and New Zealand has been made by John Gilbert of Utah State University, using the same computable general equilibrium (CGE) methodology employed in the earlier study by Scollay and Gilbert, “New Regional Trading Arrangements in the Asia-Pacific?” published by the Institute for International Economics in 2001. In the present case, the modeling exercise uses the newly released version of the Global Trade Analysis Project database (GTAP V, with a 1997 base year), which is the international standard for this purpose. Each economy is broken down into 18 sectors and the effects on individual sectors can thus be separately identified. For comparative purposes, simulations were also undertaken of a trilateral free trade arrangement including Australia as well as the United States and New Zealand (which could be either a single FTA covering all three countries or separate but parallel FTAs between the United States and each of the other two countries).

The CGE simulations indicate that the proposed US-New Zealand FTA will have strongly favorable effects on the trade of both countries. The relevant information for the United States is provided in Tables 1 and 2, where the corresponding data on US trade with Australia and the combined CER economies are also given for comparative purposes. Table 1 summarizes US Census Bureau data on US merchandise exports and imports for 2001, broken down into ten major sectors. Table 2 summarizes the effects of the proposed FTAs on US merchandise exports as indicated by the CGE simulations, broken down into a larger number (18) of sectors taken from the GTAPV database. The focus here is on merchandise exports; although the services sector is included in the model, its treatment in the GTAP database is much less detailed and the results for service exports are not shown.

The analysis shows that US merchandise exports to New Zealand would rise by about 25 percent as a result of an FTA. Increases of about 23 per cent are indicated for US merchandise exports to Australia under a U.S.-Australia FTA and for U.S. combined exports to Australia and New Zealand under a trilateral free trade arrangement. In dollar terms, the increase in US merchandise exports to the two economies under a trilateral free trade arrangement would be about $3 billion. These figures reflect only the response of trade to the removal of trade barriers between the FTA partners and do not take account of the favorable dynamic factors that invariably operate as the economies of FTA partners become more closely integrated.

The increases in US exports to New Zealand under the US-New Zealand FTA are spread across all sectors. Both agricultural and manufacturing exports increase significantly. A noteworthy feature is the increase in US exports to New Zealand of milk products despite the fact that New Zealand exports in this sector also increase strongly, as expected. Although the effect on US exports to other countries is not shown in the table, the simulations in fact indicate that a US-New Zealand FTA would lead to a small but perceptible increase in US exports of milk products to virtually all Asia-Pacific countries. This suggests that increased competition under the proposed FTA will increase the international competitiveness of the US dairy industry.

Although the details are not reproduced here, New Zealand merchandise exports to the United States will also increase strongly. They are projected to rise by $732 million, or 51 percent, under a US-New Zealand FTA and by $703 million, or 49 percent, under a trilateral free trade arrangement.

Any trade liberalization initiative will lead to some production adjustments in the economies involved. The simulation results show that production effects in the United States arising from a US-New Zealand FTA will be minimal, however, even for the milk products sector. Production changes do not exceed 0.6 percent for any sector and the changes are negligible for most sectors.

Given the small size of the New Zealand economy relative to the United States, it would be expected that the magnitude of the overall economic effects, expressed as a percentage of GDP, would be quite modest for the United States and rather larger for New Zealand. This expectation is borne out by the simulation results.

It should be remembered, however, that these results relate only to the changes in merchandise exports following the establishment of an FTA. A series of studies by Brown, Deardorff and Stern at the University of Michigan, including more detailed treatment of the services sector than is available here, have shown that the United States generally gains much more from liberalization of trade in services than from liberalization of trade in goods. It is quite likely that the same pattern will apply to a free trade agreement between the United States and New Zealand. At present the CER and New Zealand-Singapore Closer Economic Partnership Agreement favor service providers from Australia and Singapore in the New Zealand market, relative to providers from other countries. This disadvantage for the United States would be neutralized if the United States entered into an FTA with New Zealand, covering services trade as well as trade in goods.

A significant feature of the results is that free trade between the United States and New Zealand will have a negative effect on the economic welfare of Australia while, similarly, free trade between the United States and Australia will have a negative effect on the economic welfare of New Zealand. By contrast, there will be a positive impact on both Australia and New Zealand if the United States simultaneously establishes free trade with both.

THE ABSENCE OF SIGNIFICANT OBSTACLES

There are remarkably few issues that are likely to create significant difficulties in negotiating a US-NZ FTA.

From the perspective of the United States, one obvious sensitivity will be increased New Zealand access to the United States market for dairy products. In practice, any such arrangement would be phased in over a lengthy period as has been the case with sensitive agricultural sectors in previous trade agreements. Furthermore, although New Zealand is a highly competitive exporter of dairy products, its output is less than 2 percent of global dairy production and only one sixth that of the United States itself. Our simulations suggest that US domestic dairy production would decline by only 0.5 percent as a result of such an agreement. To put this figure in perspective, it can be noted that earlier studies at the Institute for International Economics concluded that the larger drop in US dairy production (2.5 percent) that would follow the global elimination of US dairy quotas would adversely affect fewer than 3,000 jobs in the United States and that a more detailed study by the US International Trade Commission showed even smaller effects.

In the past, New Zealand exports of some agricultural products, notably dairy products, apples and pears, and kiwifruit were controlled by producer-owned marketing boards, which either monopolized exports as single sellers or were given the power to license sellers. Successive governments, however, have reformed these boards to operate under standard commercial structures. The former marketing boards for dairy products, and apples and pears, have been replaced by limited liability companies. Export monopolies have been either abolished, as in the case of apples and pears and dairy products for all but some quota restricted markets, or diluted as in the case of kiwifruit.

Indeed, two such strong agricultural exporters as the United States and New Zealand should be able to use their FTA negotiations to work out creative arrangements for dealing with farm trade problems that could then be applied in the broader WTO and APEC contexts. It is thus fortunate that a US – NZ FTA would proceed in parallel with the new Doha round in the WTO, where agricultural liberalization is both a central issue and a central objective of the two countries.

Concerns have been expressed by the United States over the implications for intellectual property protection of the decision by a previous New Zealand government to legalize parallel importing on certain non-patented products. This move was introduced in the interest of a more competitive marketplace in New Zealand. The current government has already adopted measures that address some of the resulting concerns over intellectual property protection and has foreshadowed further legislation in 2002 to reinforce the already high level of intellectual property protection prevailing in New Zealand. In late 2001 the government announced a ban on the parallel importation of motion picture films, videos and DVDs for a period of nine months from the date of first international release.

The United States has also expressed concerns over the operation of the Pharmaceutical Management Agency (Pharmac), which was established to manage the purchase of pharmaceuticals for the national health care system in a cost effective manner. Its principal instrument to achieve this is a Pharmaceutical Schedule listing medicines which qualify for government subsidization and indicating the amount of reimbursement to be paid in each case. While there is no formal restriction on the sale of non-subsidized pharmaceuticals in New Zealand, Pharmac’s decisions clearly do influence which pharmaceuticals are sold in New Zealand, in what quantity and at what price. Critics of Pharmac have argued that its operating policies and procedures function as a barrier to market access, and are seeking fundamental changes in these operating policies and procedures. New Zealand meantime has attempted to improve communications between Pharmac and stakeholders, including the pharmaceutical companies, while at the same time expressing confidence that the policies and procedures of Pharmac are fully consistent with all relevant WTO obligations. New Zealand has also argued that Pharmac’s measures are similar to those used by some agencies in the United States, for example, Health Maintenance Organizations. More analysis is needed to determine whether and in what way Pharmac’s operations constitute a barrier to trade.

This relatively short list of contentious issues suggests that a free trade agreement between the United States and New Zealand could be concluded quickly. It could thus make an important contribution to the trade policy strategies of both countries, to which we now turn.

A UNITED STATES – NEW ZEALAND FREE TRADE AGREEMENT AND GLOBAL ECONOMIC STRATEGY

A US – NZ free trade agreement would promote at least half a dozen major strategic goals of US global economic policy. Not surprisingly, in light of the extent of trade interests held in common by the two countries, these goals also coincide to a remarkable degree with the goals of New Zealand. The proposed free trade agreement would:

 assist in accelerating the momentum of trade liberalization, helping to fend off the omnipresent pressures for protectionism and mercantilism;

 create incentives for America’s other trading partners to cooperate in reducing their own barriers, in the broader WTO and APEC contexts or by pursuing similar FTAs, to avoid new discrimination against their own exports;

 represent concrete progress toward meeting APEC’s goals of “free and open trade and investment in the Asia Pacific region by 2010,” which have proved resistant to alternative approaches;

 help to reduce the rising risk of polarization of the Asia-Pacific region between competing trade blocs on either side of the Pacific, and avoid a potentially dangerous tripolar world with heavy new trade discrimination, both by the impetus that it provides towards attainment of APEC goals and by the added stimulus that the forging of such a transoceanic FTA will give to the trans-Pacific dimension of Asia-Pacific economic integration;

 encourage other countries to liberalize and reform by offering tangible recognition for a country that has been a model of both trade liberalization and broader economic reform; and

 based on New Zealand’s exemplary FTAs with Australia and Singapore, almost certainly pioneer high new standards for trade agreements that could establish a benchmark for others who seek increased market access to the United States through bilaterals, in APEC and at the global level in the WTO.

Restarting Trade Momentum

US trade policy for over fifty years has been based on the premise that it is essential to maintain steady progress toward liberalization. New Zealand likewise has consistently sought to encourage momentum toward multilateral and regional liberalization. In the absence of such momentum, protectionist pressures fill the vacuum and markets tend to close rather than open. The postwar history of trade policy, especially in the United States but globally as well, provides ample proof of this theorem.

The current situation is thus potentially dangerous. Despite declarations at Doha to launch a new WTO round, and at Quebec City to begin serious negotiations for a Free Trade Area of the Americas, it is unclear how far and how fast either of those initiatives will actually proceed — given the reluctance of France and some other European countries, and Brazil and now Argentina due to the lasting effects of its financial crisis, respectively.

In fact, little significant reciprocal liberalization has taken place anywhere in the world since completion of the three post–Uruguay Round sectoral agreements in the WTO in 1996-97. There has been much talk of new bilateral and subregional arrangements, such as the proposals from both China and Japan to negotiate FTAs with ASEAN, but very little has actually been accomplished.

A US – NZ FTA could be negotiated quickly, as noted above, and thus provide new momentum for liberalization. This would be especially true if it were joined, as it inevitably would be, by a parallel and much larger US – Australia agreement. Such a pact would be qualitatively as well as quantitatively much larger than the other FTAs that the United States is now pursuing, with Chile and Singapore, and hence could be much more important in restarting the engine of trade liberalization.

The Catalytic Impact

One of the positive effects of new regional trading arrangements is the impetus they provide to “competitive liberalization”. Countries that are not party to the arrangement face new discrimination in their export markets. If these countries are thereby prompted to avert such negative impacts by entering into broader trade arrangements, a potentially unfavorable effect of regional trading arrangements can be converted into a stimulus for broader regional and eventually global liberalization.

The United States itself, throughout the postwar period, has been driven by just such concerns vis-à-vis the European Union as that trade bloc deepened and expanded to include more members. Europe has been similarly motivated when the United States has demonstrated willingness and ability to move ahead regionally with other partners, as with both NAFTA and APEC in the early 1990s.

A US-New Zealand FTA will contribute to this pressure for “competitive liberalization.” Since a US-New Zealand FTA would inevitably develop in parallel with a US-Australia FTA, the potential stimulus to “competitive liberalization” will be significant. The impact would be even greater if the arrangements included Singapore and/or other countries that might negotiate separate FTAs with the United States, New Zealand and Australia.

Advancing APEC’s Free Trade Goals

One particular US and New Zealand goal that would be promoted by such initiatives is the achievement of “free and open trade and investment in the Asia Pacific by 2010,” the goal agreed by the APEC membership in 1993-94 with strong leadership from the United States and strong support from New Zealand. As with other major trade initiatives, the US goal was as much strategic as economic: APEC was conceived as an Asia Pacific initiative to counter proposals for an East Asian Economic Group that would exclude the United States. The administration of President George H.W. Bush reacted very strongly against the exclusive East Asia ideas, pushing hard instead for APEC, and the successor Clinton administration sought to solidify the Asia Pacific linkage by forging a political commitment by the membership to achieve free trade in the region by a date certain. This goal is even more important for the United States today, with the revival of East Asian regional initiatives in both the trade and monetary areas that could push the United States out of a region that is far more significant now than it was a decade ago.

Achievement of that goal, or even tangible progress toward it, has proven elusive. APEC has adopted four different strategies to date but none has been very successful. The first strategy was “concerted unilateralism,” to be driven by “individual action plans” (IAPs) submitted annually by each member, but very little unilateral liberalization has occurred since 1994 and the IAPs have become ex post reporting devices rather than ex ante vehicles for action.

APEC’s second strategy was sectoral liberalization. This approach got off to an excellent start with the Information Technology Agreement in 1996, which APEC agreed to at its Subic summit and then broadened to include the European Union and others at the first WTO Ministerial Conference in Singapore a few weeks later, to liberalize over half a trillion dollars worth of trade in goods and services in the world’s most dynamic sectors. Buoyed by that result, the APEC economies identified nine more sectors over the succeeding year for “priority action”—but failed to liberalize any of them, finally remanding them to the WTO.

The third strategy was the WTO itself, with APEC in 1999 declaring that it would pursue its goal of regional free trade by taking the lead in launching a new global liberalization round. Far from taking such a lead, however, APEC’s two largest economies, the United States and Japan, were on opposite sides of most of the key issues at Seattle and APEC as a group was nowhere to be seen. The recent Doha agreement to launch a global round revives this strategy to a degree but, as noted, the outlook for success of that WTO initiative is quite unclear at this point.

APEC thus needs a new strategy if its goals are to be achieved. The most promising is for subsets of countries within the region to take the lead by moving toward free trade on their own, inviting the rest of the membership to join in as soon as they are ready. APEC’s Shanghai summit in October 2001 indeed embraced such a strategy formally by endorsing “pathfinder agreements,” in which willing subgroups would take the lead on trade liberalization (or other APEC goals). Such subregional approaches have in fact always been part of the operating procedures of APEC, and of ASEAN before it.

A US-NZ free trade agreement, especially if broadened to Australia, would have a powerful impact in this context. A trilateral arrangement among the United States, Australia and New Zealand would encompass over half of total APEC output, thereby providing substantial inducements for the rest of the membership to follow. Some key leaders of important APEC economies have always believed that negotiation of a sequential series of subregional liberalization pacts was the most effective route to achievement of the Bogor goals, and adoption of a United States-New Zealand agreement now—augmenting and amplifying the NAFTA, ASEAN, CER, NZ-Singapore and Japan-Singapore FTAs that are already in place, and the US – Chile, US – Singapore and other pacts that are being negotiated—could provide a powerful impetus in that direction. It would thus help the United States pursue another of its major geostrategic, as well as international economic, goals.

Avoiding a Bipolar Pacific and Tripolar World

As just noted, a major US interest in APEC is the organization’s promise of forging a trans-Pacific grouping that would eliminate, or at least minimize, the risk of polarization of the Asia-Pacific region that would follow from the emergence of trade blocs confined to East Asian countries on one side of the Pacific and the hemisphere of the Americas on the other. Such an East Asian grouping would threaten the key US interest in trans-Pacific trade and would inevitably limit US participation in East Asia, politically as well as economically. It would also create a tripolar world, with East Asia becoming a global pole along with the United States and the European Union, an inherently dangerous configuration that could presage the onset of trade and other economic conflicts and even military confrontations. New Zealand and Australia share this US interest in avoiding polarization of the Asia-Pacific region as both countries have vital trade interests on each side of the Pacific, and because their participation in any East Asian grouping would be highly uncertain.

A number of East Asian initiatives are now well underway. Though some key Asian countries (notably China) themselves rejected the Asian Monetary Fund proposed by Japan in 1997, the full ASEAN plus Three (including China, Japan and Korea) are now completing a Network of Bilateral Swap Agreements. This Chiang Mai Initiative amounts to a modest $30 billion so far but, like the G-7/G-10 at the global level which began in the same way in the early 1960s, could provide the foundation for an East Asian arrangement that could ultimately challenge the International Monetary Fund (and hence the United States) for global financial supremacy.

On the trade side, similar ASEAN plus Three discussions began a couple of years ago. Due to the rivalry between China and Japan for leadership of the region, this initial effort has now given way to competing China-ASEAN and Japan-ASEAN initiatives. It is difficult to imagine such a bifurcation continuing for long, however, both because of the burden it places on the ASEAN countries and because Korea would be left out. Hence comprehensive East Asian arrangements in both the monetary and trade areas are distinct possibilities.

This prospect underlines the importance for the United States, and for New Zealand and Australia, of reinvigorating APEC as described above. So does the prospect of a Free Trade Area of the Americas, which would increase anxieties in East Asia about the evolution of a comprehensive bloc in the Western Hemisphere. Such an outlook enhances the case for transoceanic FTAs that would bridge the continents and reduce the risks of a tripolar world. Prime Minister Goh Chok Tong of Singapore indeed suggested just such a rationale for a US-Singapore FTA and the concept would apply equally to a US-NZ FTA.

Recognizing and Promoting Reform

One central and traditional goal of US foreign policy has been to encourage other countries to adopt market-oriented reforms. This goal is based on political as well as economic motives: that such reforms, in addition to strengthening the countries’ economies and thus enhancing their attractiveness as economic partners , will over time lead to more open and eventually democratic political systems.

Trade agreements are one tool for pursuing these US objectives. Such agreements can be multilateral, as with China’s recent entry to the World Trade Organization. They can be regional: President George H. W. Bush’s offer of an Enterprise for the Americas Initiative, later converted by President Clinton into a Free Trade Area of the Americas, triggered a spate of trade liberalization and economic reform throughout the Americas as countries scrambled to qualify for participation.

Bilateral trade pacts are another important part of this approach. Mexico undertook wide-ranging economic reforms in the late 1980s and early 1990s, after its debt crisis of the early 1980s, largely to qualify for what eventually became NAFTA. Chile was embraced as “the next member of NAFTA” from the early 1990s, and now as an FTA partner, to reward both its return to democracy and the reforms that have made it a model as the growth and stability leader of South America. United States willingness to pursue an FTA with Singapore rests partly on similar grounds.

An FTA with New Zealand would continue and underline this tradition. New Zealand is another leading model of reform, having led the world in a series of policy innovations since the late 1980s as a series of sweeping economic reforms transformed New Zealand into a highly competitive economy. Through its Reserve Bank Act (1989), it was one of the first countries in the world to guarantee the political independence of its central bank and to establish price stability as the sole objective of monetary policy; its pioneering approach to inflation targeting has since been adopted by many other countries as their guidepost for monetary policy. Its Fiscal Responsibility Act (1994) represented a pioneering approach to requiring transparency in the conduct of fiscal policy, and New Zealand was the first country in the world to require publication of a set of government accounts that includes a balance sheet of the government’s assets and liabilities and an accrual-based operating statement of its income and expenses – similar to the accounts of a private company. The Employment Relations Act (2001) provides for a highly flexible labor market that strongly emphasizes individual contracts while at the same time reserving rights to collective bargaining where this is the preference of the parties. Measured as a percentage of GDP, New Zealand’s privatization program has been one of the world’s largest. Its approach to public sector reform has been widely studied and in some cases emulated by developing and developed countries alike.

New Zealand has also become one of the most committed supporters and practitioners of open, outward-looking trade policies. It has steadily reduced its own tariffs over many years, and there are no quotas or import licensing restrictions applying to imports into New Zealand. No export subsidies apply to New Zealand exports. No trade or production distorting subsidies are paid to the New Zealand agricultural sector. Foreign direct investment into New Zealand above certain thresholds is subject to approval but the Overseas Investment Commission maintains a rapid turnaround in processing applications and has a record of approving the vast majority of proposals submitted to it.

New Zealand has consistently been among the strongest supporters of the multilateral trading system based around the WTO and its predecessor, the GATT, and is one of the most robust allies of the United States in the pursuit of trade-promoting and market-opening initiatives. In the forthcoming Doha round at the WTO, this alliance could be pursued with particular effect in the agriculture sector

In the field of civil aviation, New Zealand has been one of the most active countries in establishing “open skies” agreements, including with the United States. In 2001 its “open skies” agreement with the United States was replaced by a multilateral “open skies” agreement among New Zealand and the United States, Singapore, Brunei and Chile. This agreement is the first of its kind, and a model for the APEC region, in that it is open to any other state that wishes to become a signatory without the need for separate negotiations with the existing parties.

Negotiation of a US-NZ FTA would thus remind the world that the United States recognizes exemplary economic policy and adherence to the principles of the market. It would represent a parallel, across the Pacific, to the FTA currently under negotiation with Chile. Such a pact would have a powerful demonstration effect around the region and throughout the world.

Setting the Highest Standards

The final US strategic objective to be served by a US – NZ FTA is the perennial goal of strengthening the rules that govern international trade and investment. Again, this is a shared goal with New Zealand. Bilateral FTAs have often led the way toward the formulation and adoption of standards that were subsequently translated into multilateral accords. Examples include the services component of the Canada – US FTA, which established important precedents for the General Agreement on Trade in Services (GATS) negotiated during the Uruguay Round in the GATT/WTO.

FTAs must meet high standards if they are to strengthen rather than weaken the multilateral approach to trade and investment liberalization. The CER agreement between Australia and New Zealand is exemplary in this regard. A pathbreaking step in CER was the elimination of anti-dumping actions between the two partner countries once free trade was achieved.

In addition, New Zealand and Singapore have recently concluded an FTA, the New Zealand Singapore Closer Economic Partnership Agreement (NZSCEP), which is also a model agreement. That pact provides for immediate and complete elimination of all barriers to trade in goods. Extensive liberalization of services trade occurs immediately, with full liberalization by 2010. Particular attention is paid to the development of mutual recognition of professional qualifications. The NZSCEP thus has comprehensive coverage, including liberalization of services as well as goods, and complies fully with both WTO requirements and APEC goals. In the latter respect, it stands in sharp contrast to the new Japan – Singapore FTA, which excludes most of the agricultural sector (despite the total absence of agricultural trade between the countries) and thus does not meet APEC’s key criterion of comprehensive coverage.

The NZSCEP also contains provisions on standards, and on sanitary and phytosanitary measures. It improves on the CER agreement by adopting more liberal rules of origin, and by including provisions on investment and competition policy.

There is thus good reason to expect that a US – NZ FTA would be of a similarly high standard to New Zealand’s two existing bilateral agreements as well as the United States’ agreements with Canada and Mexico. A high-standard US-NZ FTA would create a powerful demonstration effect for other countries contemplating new bilateral trade arrangements, providing a precedent that is unambiguously supportive of both the multilateral trading system and APEC goals.

The approaches taken by both the United States and New Zealand to the design of bilateral agreements also provide grounds for confidence that a US-NZ FTA would break new ground in creating imaginative approaches to a variety of international trade problems. Such innovations would be particularly valuable at the present time, in the run up to a new WTO round that will address a number of issues not previously on the multilateral agenda. The agricultural sector should be a particular area where the United States and New Zealand (and others, such as Australia) could work together to forge creative new solutions.

CONCLUSION

A US – NZ FTA could thus advance a large number of central objectives of the trade policy, international economic policy, and potentially the overall foreign policy of both the United States and New Zealand. It would restart and accelerate the momentum of trade liberalization. It would create incentives for other trading partners to participate effectively in that renewed liberalization process. It would contribute specifically toward achievement of APEC’s trade policy goals, with their important political as well as economic implications. By doing so, it would reduce the risk of polarization of the Asia-Pacific region that could push the world toward a tripolar configuration that would be extremely dangerous in security as well as economic terms.

An FTA with the United States would tangibly recognize New Zealand’s innovative and sweeping economic reforms of the past two decades, and thus offer incentives for other countries to do likewise. In addition, the record of New Zealand (as well as United States) trade agreements suggests that such a bilateral pact would be fully supportive of both the WTO and APEC. It could indeed be expected to come up with creative ideas to pave the way for broader multilateral agreements, in APEC and especially at the WTO, on some of the new and difficult issues that will be on the agenda for their upcoming trade negotiations.

There is thus a compelling case for the early launch of negotiations for an FTA between New Zealand and the United States. The government of New Zealand, together with the major opposition party in that country, have indicated their strong desire to develop such a pact. The United States should respond positively and begin the effort as soon as possible.
TABLE 1

US Merchandise Exports to New Zealand and Australia (2001)

1-Digit SITC Commodity New Zealand Australia CER Combined
$million % $million % $million %
0-Food and Live Animals 102.19 4.8% 238.2 2.2% 340.39 2.6%
1-Beverages and Tobacco 6.25 0.3% 84.54 0.8% 90.79 0.7%
2-Crude Materials, Inedible, Except Fuels 23.01 1.1% 108.93 1.0% 131.94 1.0%
3-Mineral Fuels, Lubricants & Related Materials 32.44 1.5% 139.85 1.3% 172.29 1.3%
4-Animal and Vegetable Oils, Fats and Waxes 0.63 0.0% 2.4 0.0% 3.03 0.0%
5-Chemicals and Related Products, N.E.S. 241.4 11.3% 1,750.41 16.0% 1,991.81 15.2%
6-Manufactured Goods Classified Chiefly by Material 92.25 4.3% 659.69 6.0% 751.94 5.7%
7-Machinery and Transport Equipment 1,304.99 61.1% 5,942.78 54.3% 7,247.77 55.4%
8-Miscellaneous Manufactured Articles 179.95 8.4% 1,484.19 13.6% 1,664.14 12.7%
9-Commodities and Transactions N.E.S. 151.26 7.1% 533.84 4.9% 685.1 5.2%
TOTAL 2,134.37 100.0% 10,944.83 100.0% 13,079.2 100.0%

Source: US Census Bureau, Foreign Trade Division, Data Dissemination Branch

US Merchandise Imports from New Zealand and Australia (2001)

1-Digit SITC Commodity New Zealand Australia CER Combined
$million % $million % $million %
0-Food and Live Animals 1,048.80 47.7% 1,301.48 20.1% 2,350.28 27.1%
1-Beverages and Tobacco 26.47 1.2% 349.19 5.4% 375.66 4.3%
2-Crude Materials, Inedible, Except Fuels 243.15 11.1% 724.14 11.2% 967.29 11.1%
3-Mineral Fuels, Lubricants & Related Materials 16.22 0.7% 476.64 7.4% 492.86 5.7%
4-Animal and Vegetable Oils, Fats and Waxes 0.52 0.0% 4.26 0.1% 4.78 0.1%
5-Chemicals and Related Products, N.E.S. 297.81 13.5% 442.22 6.8% 740.03 8.5%
6-Manufactured Goods Classified Chiefly by Material 137.69 6.3% 826.27 12.8% 963.96 11.1%
7-Machinery and Transport Equipment 234.95 10.7% 1,122.37 17.3% 1,357.32 15.6%
8-Miscellaneous Manufactured Articles 91.24 4.1% 698.34 10.8% 789.58 9.1%
9-Commodities and Transactions N.E.S. 102.97 4.7% 534.09 8.2% 637.06 7.3%
TOTAL 2,199.83 100.0% 6,479.00 100.0% 8,678.83 100.0%

Source: US Census Bureau, Foreign Trade Division, Data Dissemination Branch

TABLE 2

Change in US Merchandise Exports
(in percent)

Exports to New Zealand Exports to Australia Exports to New Zealand+Australia
(US-New Zealand FTA) (US-Australia FTA) (US-New Zealand-Australia FTA)
Rice 2.03 4.91 4.82
Wheat and grains 10.13 4.57 5.70
Other non-grain crops 13.58 10.06 10.97
Forestry 0.23 1.01 0.92
Fisheries 6.15 3.37 5.00
Meat products 10.18 6.97 8.41
Milk products 63.08 37.37 45.13
Other food products 51.74 29.76 34.24
Mining and quarrying 3.90 -0.03 0.18
Textiles and apparel 67.09 133.05 121.32
Wood products 29.25 12.92 15.28
Chemical products 14.62 12.75 12.98
Metal products 33.34 17.36 19.42
Fabricated metal products 43.22 37.64 38.54
Transportation equipment 51.44 27.82 46.94
Electronic Machinery 11.98 4.41 5.23
Machinery 25.58 18.29 19.19
Other manufactured products 41.82 19.53 22.72
TOTAL 25.10 22.61 22.96

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