Four years ago, New Zealand wanted to join Australia in a quest for a three-way free trade deal with the United States . As one commentator described subsequent events, “ Australia judged New Zealand a political liability and cut its neighbour adrift.”

The two South Pacific countries took divergent paths. Australian prime minister John Howard made a security alliance with the world's sole superpower the centre of his foreign and defence policies. Prime minister Helen Clark has tended to look to Europe for a lead, rather than to traditional allies.

The New Zealand government held out hopes of riding on the coat-tails of Australian efforts to get a free trade agreement with the United States . It sought to argue that the Australia -New Zealand Closer Economic Relations Agreement (CER) meant any benefits from a trade liberalisation deal should flow on to New Zealand.

After eleven months of negotiations, president George W Bush and John Howard have announced that their countries have formulated a free trade agreement that includes:

• immediate, free and open access to the US market for Australian exporters of almost all manufactured goods and services;
• duty-free access from day one for over 97 percent of Australia's manufacturing exports to the United States, worth NZ$6.5 billion last year;
• reducing more than 66 percent of agricultural tariffs to zero from day one;
• full access for Australian goods and services to the NZ$300 billion market for federal government procurement in the United States; and
• enhanced legal protections that guarantee market access and non-discriminatory treatment for Australian service providers in the US market.

Australian consumers will benefit from greater choice and competition. Freer trade will be associated with freer investment flows. New Zealand will forgo these benefits. Past economic modelling for the Treasury projected that a US-Australia free trade deal would reduce New Zealand 's national income and have a negative impact on foreign investment flows.

The historic importance of the agreement is that it will help Australia further improve its competitiveness and become a freer, more dynamic economy.

Australian economist Wolfgang Kasper said last year that the country's “long, hard climb up the economic freedom ladder has stalled”. The biggest handicaps, Kasper said, were the burden of government and artificial restrictions on Australians being able to use their labour and talents freely. “The best hope that these handicaps will be redressed and Australia's flagging commitment to economic freedom will be revived lies in the prospective economic integration agreement with the United States … The growing integration with the relatively free US economy will make further reforms and competitive attitudes imperative.”

Such benefits would also be extremely significant to New Zealand , were it to secure an FTA with the United States . At a time when economic reform has been stalled or reversed, an agreement could trigger a new willingness to adjust and compete. A closer association with the world's pre-eminent economy might be a transmission belt for some of the things that make America such a successful country – its attachment to constitutional democracy, support for limited government and individual freedoms, respect for property rights, entrepreneurial culture, business skills, flexibility and dynamism.

Last May, however, the US embassy made it clear that New Zealand should not expect a deal any time soon.

"The United States is not prepared to enter into FTA negotiations with New Zealand at this time," it said bluntly, "though we have not ruled out the possibility of an FTA … at some point in the future."

What would it take for New Zealand to secure its own agreement? US decisions on trade agreements are based on a wide range of factors including trade, political, security and other elements of the bilateral relationship. The message coming from Washington seems to be that New Zealand must expend some political capital if it wants to make progress.

Foreign affairs minister Phil Goff has said the integration of the Australasian economies means US negotiations with New Zealand will in due course be a logical step. However, it is impossible to ignore geo-political considerations.

New Zealand 's failure to date to secure an FTA is not the end of the world, but end-of-the-world scenarios are not the relevant ones to contemplate. In economic life, no single policy misstep – an increase in the tax rate here, a reversal of labour market deregulation there – is in itself the end of the world. But the costs of a series of missteps or a series of missed opportunities mount up over time.

The government has chosen to take New Zealand down a path that takes it away from old allies, and towards European-style international relations, welfare, labour market and environmental policies. Europe 's big economies are uncompetitive and struggling to grow. If New Zealand is to achieve long-term sustainable growth, current directions must be called into question.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz