July Trade Update
The EU-NZ FTA end game was fascinating to watch
Last month we were awaiting the PM’s visit to Brussels and did not know whether New Zealand would be prepared to finalise the FTA with the EU or seek to extend negotiations in the hope of getting a more commercially meaningful outcome for meat and dairy.
There were many theatrics involved but it seems that so long as the EU were to agree a very modest outcome on meat and dairy – a bit better than the status quo – New Zealand was prepared to settle the agreement.
This was high risk for the Government.
It gave them an apparent political win at a time when pretty much everything is going badly for them, but it risked a back lash from the meat and dairy sectors. That risk has become a reality.
It is important to note that aside from the quota and tariff arrangements agreed on meat and dairy the EU-NZ FTA is pretty much excellent for everyone else.
MFAT negotiators will stress that this is not the first time that a FTA outcome has fallen short of achieving the eventual elimination of all tariffs. Likewise others have seen permanent quota arrangements. Japan’s CPTPP commitments are an example. The US commitments to TPP were another (these never came into effect as the US never ratified TPP and President Trump withdrew from the agreement).
But the difference between Japan and the US and the EU agreement is that the meat and dairy sectors agreed to these outcomes before the deal was sealed. With respect to the EU these sectors wanted better outcomes. For the first time the Government has been willing to take these influential sectors on and risk their dissatisfaction. It is this that will be noted by those contemplating future FTA ties with New Zealand. Might this deal open the door a bit further for eventual agreements with India, Latin America and some African jurisdictions?
The FTA agreement and an existing agreement between the EU and Turkey over their Customs union mean that once the EU-NZ Agreement comes into force New Zealand will get free access into the Turkish market for non-agricultural exports (New Zealand is not obliged to reciprocate – but our tariffs are very low already for most non-agriculture products). Turkey and New Zealand are also obliged to “endeavour” to negotiate a FTA that would cover other areas.
There are other benefits in the EU deal that have not been much discussed. The EU is going to eventually get bigger for example. One of those in the accession process is a very large economy – Ukraine. Unfortunately the quota controls in the agreement will not allow meat and dairy to benefit as much from such expansions as other exporters.
The Government has decided that it has negotiated the best possible outcome given the circumstances that it faced. And certainly there are no guarantees that an extension of the negotiations would have delivered a better outcome for dairy and meat. Indeed there is a risk that with political change there might have been a worse outcome. This is a call that only the Government of the day can make and negotiators need to be thanked for their very hard work and for delivering what is a very good outcome for most sectors.
The challenge now is to get this agreement ratified as quickly as possible. As we have seen with both TPP and CPTPP this is not always straight forward.
On the topic of ratification there are observers who are getting nervous about what impact that current chaos in the Conservative Party might have for the passage of the Bill needed to ratify both the UK’s FTAs with Australia and New Zealand.
There are several big questions that jump to mind.
Will there be a delay in passage of this Bill?
Will the new Conservative leadership be as committed to free trade as Boris Johnson was?
If not, will there be any attempt made to reopen the negotiation?
At this stage we cannot answer these questions. Minister O’Connor says that he is confident that the Bill will pass and that the Agreement will be ratified by the end of the year. We hope he is accurate in his prediction.
New Zealand and Australian negotiators note that they have some leverage over the UK as the UK is currently seeking to joining CPTPP. That is true. But will any Conservative Leader other than Liz Truss actually care much about CPTPP? Again, we do not know.