Stoking the engine of growth: Tim Groser discusses the trans-pacific partnership proposal and New Zealand's export future.

• Author: Groser, Tim

New Zealand is a firm supporter of the removal of trade barriers--an approach that is strongly endorsed by those who run our export companies, This is reflected in a survey of these enterprises conducted in 2009 to assess the impact on them of free trade agreements. The removal of barriers helps these companies to acquire new knowledge and technology. We are making progress in this direction. Nearly 50 per cent of New Zealand exports are now covered by free trade agreements. The Trans-Pacific Partnership is the centre-piece in our current efforts to push forward the process of trade liberalisation.

Let me begin with a small reflective tribute to the late Sir Frank Holmes, an absolute stalwart of the Pacific Economic Cooperation Council. This must be the first formal or informal PECC meeting I have attended in the last 30 years without Sir Frank being an integral part of the discussion.

Sir Frank, who passed away only recently, was a considerable intellectual influence on me and no doubt many people of my generation interested in international trade. He wrote some of the first applied economics papers I read, often in conjunction with Professor Peter Lloyd for the New Zealand Institute of Economic Research.

Like other international economists of the time--I am thinking of Richard Lipsey, Max Corden and others--Holmes and Lloyd took the theory of the second-best, out of sophisticated game theory literature, and applied it in their case to New Zealand's circumstances of the 1960s and 1970s. Put simply, this thinking hugely influenced the design and policy rationale of New Zealand's first ever genuine free trade agreement--the CER agreement.

That first comprehensive free trade agreement, finally ratified in 1983, had in turn a huge impact on policy thinking on free trade agreements around the world. It was literally the 'gold standard' of free trade agreements of its day. To say 'of its day' is probably understating its influence; fundamental design principles like progressive liberalisation over many years to deal with sensitivities, comprehensive product coverage, carefully designed review clauses and so forth continue to be valid and to influence Australian and New Zealand negotiating approaches 30 years on.

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Because New Zealand is the legal 'depository' or 'administrator' of the Trans-Pacific Partnership negotiation, I had the privilege of announcing in June on behalf of New Zealand, Australia, the United States and all existing TPP members that I had signed a formal letter inviting the government of Mexico to join the TPP. I also sent a similar letter to the Canadian trade minister.

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The TPP is deeply influenced by the same political economy thinking underwriting CER. In other words, public policy ideas advanced decades ago by the two intellectuals Frank Holmes and Peter Lloyd continue to influence real world events such as this. It is a remarkable testimony to Keynes's point about the persistent tendency of so-called 'practical men' to under-estimate the power of ideas.

Basic truths

Before elaborating on the TPP and the significance of Mexico's and Canada's entry into the negotiation, I want to restate some basic truths about trade liberalisation, the jobs it creates, the productivity and innovation it leads to and the new markets it opens up.

I started with high-level game theory. Now let me go straight to the coalface to make the same point. In June I visited a very small New Zealand export company in Hamilton that has absolutely nothing to do with New Zealand's core resource strengths in the primary sector. It is called Proform Plastics. It is an automotive parts company that arose out of the ashes of the old import licensing system and is now overwhelmingly export-oriented, having successfully got itself into the global supply chain of a couple of major international automotive companies.

Proform employs about 120 local people in design, administration and manufacturing. It manufactures everything on site, but often using imported materials, and wins contracts on the quality of its product offering, its service and IP package--it is not just competing on price. As is the case for most successful things New Zealand does from dairy through to tourism, if it is 'cheap' you want, do not come to New Zealand. If you want 'best value', then come right in.

Proform is constantly innovating its highly specialised product range on a Kaizen, or 'continuous improvement', basis--as any company which is involved in exports must. Trade and innovation are joined at the hip. Being a niche player, this company is also proud of its ability to customise its products for the specific needs of its customers. It is in that sense typical of the new generation of export companies that I visit and which give me long-term confidence in this country's future.

Major opportunities

Australia is their major market, but their people told me that they see major opportunities in three markets--the Thailand, China and, intriguingly, Mexico. They told me that without the free trade agreements we have with China and Thailand, it would have been impossible for them to compete in those markets and employ as many people as they do.

Mexico, they said, was a challenge because of an 18 per cent tariff on the components they...