The payoff from a Free Trade Agreement

By Donal Curtin 05/08/2014

Last week the Business Council of Australia released a report, Building Australia’s Comparative Advantage, which in turn built on another reportCompete to Prosper: Improving Australia’s global competitiveness, which they had commissioned from McKinsey Australia. I haven’t read either of them fully yet, and I’m not too sure whether I buy into the “let’s aggregate industries into globally competitive sectors” line taken in both of them, but in any event I also found this:

This is McKinsey’s estimate, in Aussie cents per kilogram, of New Zealand’s cost advantage over Australia in the international dairy trade. The total advantage in our favour is 55 cents per kg, which looks a sizeable amount in the context of (say) the dairy payout, and the largest part is down to our cost advantage in getting into the Chinese market duty-free as a result of our free trade agreement (FTA) with China.
You can also see the contribution of the FTA in the graph below, also from McKinsey, where after a short post-FTA lag, our dairy exports to China took off. Aussie dairy exports didn’t. For completeness, I should add that McKinsey also credit the relative vigour of our dairy industry deregulation (“Australia…deregulated but without anything approaching the intent and ambition across the Tasman”, p35), which I agree with, and also admire the creation of Fonterra (“New Zealand created a dairy industry structure that was designed to compete globally”, and Australia needs “purposeful market design”, p36), which I’m more ambivalent about, but there’s no denying a big payoff from our free trade approach.

It’s not often that we steal a diplomatic march on our friends across the sea – well done, our trade negotiators – and we may not enjoy it for long: their Business Council is recommending that Australia get a move on with FTAs with China, Hong Kong and Taiwan, and revisit existing ones to make them more agriculture friendly. But while it lasts it’s a fine example of how free trade has brought a big benefit to one of our major export industries. And even if Australia levels the playing field, there will still be enduring pay-offs for both of us.
It’s also a good riposte to some of those ugly anti-China views that are surfacing in our election campaign.

0 Responses to “The payoff from a Free Trade Agreement”

  • FTAs must work both ways, and while they may bring benefits for a while, they may not do so forever, as they can be reviewed, or become less important, as trading nations enter other FTAs with other competing nations, in order to diversify their trade.

    China is playing smart, and so are other economies, and will ensure that they will enter favourable trade agreements with a number of countries, so they have access to other markets, and are not overly dependent on such like New Zealand, for sourcing dairy and other products from.

    The above post and information presents just a snap shot of the status quo, and it can change swiftly, should Australia enter a FTA with China for agricultural goods, same as should other countries producing dairy and other agricultural products for export.

    With global trade tending to encourage trading nations to focus on producing what they can do “best” (cheapest or most competitively), some countries may develop an over-dependence on trading in a limited range of commodities. This appears to have happened to both Australia and New Zealand. Also in turn less in consumer goods is manufactured here, and instead imported from China and elsewhere.

    Australia’s farming sector produces a smaller part of their GDP than say mining, and the mining boom based largely on exports of raw materials like iron ore and coal to China has turned to a bit of a bust now, as China is sourcing the same elsewhere more cheaply, or buying less overall, as they have built up stocks.

    New Zealand has expanded trade with China to a degree, where China is now a major importer of New Zealand dairy produce, and we see now, that the initial boom is also in danger of turning into a bust, as they have recently bought also more from other export markets, and are using up stocks they bought over recent years.

    While transport by sea and lesser so by air are still relatively cheap, in future this will change, as fossil fuels become more limited and more expensive, and as alternative energy for powering ships and airplanes is also not that cheap.

    So while the going is good for New Zealand as an exporter at present, this can all change again in future.

    There will need to be a stronger focus on developing a more diverse economy, including producing more value added high quality goods and services, and more development will also need to be done locally in the regions.

    So FTAs benefit trading countries that achieve favourable terms, but they will be overtaken by further future trade agreements, be they bilateral, regional or global, leading to yet more competition at lower cost levels, which does not necessarily mean better incomes and living standards for workers involved.

    China will further develop its own dairy sector, and strive to become less dependent on imports. New Zealand and Australia will need to be pro-active and do more with what they produce themselves, as otherwise they will be forced to compete with cheaper producers in Latin America, Africa or Asia.

  • Your predictions have indeed transpired Marcus.
    We currently have the lowest milk solids payout in 5 years and its almost half what it was 6 months ago.
    To think that a small economy like NZ can compete on an open market with the likes of China is beyond ridiculous. China is now our second biggest export market yet we make up only 5% (if that) of their total imports. Economic emperialism is in full swing and most NZers are to dumb to see it.