Free trade should be fair trade
By Katie Llanos-Small, July 27th, 2008
On her weekend visit, US Secretary of State Condoleeza Rice indicated that the US is open to “warming” relations with New Zealand. This wee country has been left out of all the fun and games (the US won’t do military training exercises with Kiwis, despite the fact the two countries’ troops are active in Afghanistan, for example) because of a ban on nuclear ships entering its waters.
Media talk has edged around a free trade agreement. It’s a long way off, but it’s not a bad goal – depending on how far backwards New Zealand would have to bend to sign it. At the moment, a small-scale dairy exporter who wants to try its luck in the US market has to give a fifth of its takings to the US government in import tariffs. Cutting that back would be a good thing.
But the US has clout. The country isn’t going to want to make things tough for its heavily protected industries. At World Trade Organisation negotiations recently it oh-so-generously offered to reduce its farm subsidy cap from $16.4 billion dollars a year to a mere $15 billion. That kind of a leg-up for US farmers would make it very difficult for Kiwi farmers to compete if all trade tariffs were taken off.
Take Mexican corn production over the last few years. Subsidised US producers sent the corn they couldn’t sell in the States to Mexico, where it sold for less than what local producers could sell theirs for. As a result, Mexican corn growers turned their hand to other work. When biofuels started taking off around 2006, increased demand saw the corn price shoot up and many Mexicans were left unable to buy one of the staples of their diet. With local growers out of business through years of being unable to compete with the US, the population had little choice but to take the prices the Northern giant was offering.
It’s not a scenario Kiwis will have to worry about for some time. A bigger concern is political manoeuvrings as the countries position themselves to negotiate a deal. For the National Party, likely to take power in November’s election, a free trade deal would be a higher priority than for the current Labour government. We should make sure we’re not sacrificing a lot for an ultimately small gain - keeping an eye on the nuclear ships policy and mutual defence agreements, and scrutinising the fine print of any trade deal that comes our way.
Free trade should also be fair trade. A trade agreement which expected Kiwi farmers to compete openly with heavily subsidised US producers would be neither.
Policy detail aside, foreign minster Winston Peters would have welcomed Condi’s visit to distract from his party’s donations scandals. Over on Bay Buzz, ex-pat yank Tom quite validly wonders how on earth Winston Peters has been in power for so long. No Right Turn gets straight to the point and calls for Peters to be sacked.
Other posts by Katie Llanos-Small
July 28th, 2008 at 12:02 pm
Local corn growers in Mexico are all out of business? That’s news to me. When was the last time you went to Mexico to survey corn production? Last I heard production in Mexico was at record levels.
July 28th, 2008 at 8:30 pm
David,
Thank you for your comment. It’s nice to know the US State Department takes an interest in my writing!
To answer your question… no, I haven’t been surveying Mexican corn production recently. I didn’t mean to insinuate that all Mexican corn growers were out of business, but that production had dropped as a result of underpriced imports.
I’ve just spent some time researching this in a bit more depth. This website has statistics which show that the land area used to grow corn in Mexico has only slightly decreased since the introduction of NAFTA. The site has detailed overview of the causes of the “tortilla crisis” of early 2007. It says rising ethanol production, hoarding, and the final implementation stage of NAFTA all combined to raise the prices.
I still think it could be argued, though, that if the price of corn had not been artificially lowered by subsidies then corn production in Mexico may have been at a higher level at the time of the 2007 crisis, and the nation may have coped better.
On the main topic of my blog, I’d be interested to know what concessions you think NZ would have to make to be in the running for a trade deal.
Thanks again,
Katie
July 29th, 2008 at 7:59 am
It is impossible for agricultural trade in NAFTA to be fair unless the USA eliminates its subsidy system. Arguably its not even “free”, because the USA taxpayer is forced to cough up the subsidy money in proportion to their income, not to their consumption of corn.
By opening up trade with this backdoor scam still in place, those responsible for NAFTA must have known that it would prevent Mexican markets from facing prices that reflect the true cost of corn, and as a result that Mexican corn growers would suffer. Of course people/firms/countries often suffer from competition, but we economists generally think this is often a good thing because people stop doing things they’re not good/efficient at, and switch to other activities. The problem here is that because prices are distorted by subsidies from USA taxpayers, that market mechanism doesn’t work properly and there is a fair chance that overall efficiency is reduced.
None of this bodes well for a free trade deal between NZ (as a heavily agricultural economy) and the USA (as a blatant subsidiser of agriculture). Worse, the USA system will now be incredibly hard to change. Their food system is almost entirely geared towards using “cheap” corn in activities such as cattle fattening that are ridiculously inefficient from an energy balance perspective. Ask yourself why NZ beef farmers haven’t switched to this system en mass if its so smart - answer: its not; it only works if you get the corn for less than its cost of production.