The CPTPP: A Good Deal for New Zealand?

Samuel J. Heath

In March of this year the New Zealand government took the controversial decision of signing the Comprehensive and Progressive Trans Pacific Partnership. The CPTPP, in essence a rehashing of the original TPP edited to reflect the withdrawal of the United States, represents a major economic – and geopolitical – evolution for both NZ and the wider region, an evolution that many at home find deeply perturbing.

Two major parties in the current ruling coalition, Labour and New Zealand First, changed their tune on the partnership following the modifications made to the deal in the wake of the US’s departure, having previously opposed the TPP. This indicates that the changes have, in their eyes, sufficed to remove the objectionable parts of the deal. Others, including the Greens, remain unconvinced that the new agreement is in NZ’s interests.

It is true that the CTPP is far superior to the original TPP because many of the worst and most contentious elements of that deal were those for which the US was the only country pressing. Twenty such provisions, in fact, have been suspended from the CPTPP, mainly in the fields of investment and intellectual property. For example, the provisions to extend copyright protection from 50 to 70 years and to extend the terms of patents in the event of delays in their granting or in licensing their importation have thankfully both been suspended.

Another controversial element has been significantly limited though not removed. The investor-state dispute settlement procedure is a mechanism whereby a foreign company investing in NZ will be able to sue the NZ government if the latter implements public policy in a way prejudicial the former’s interests – by nationalising a factory, for instance, or introducing new regulation. In the CPTPP, ISDS is restricted in that companies in an investment contract with the government itself will not have recourse to the mechanism.

The effects of ISDS on NZ will also be mitigated by the “side-letters” with treaty-level status that the government has signed with five other CPTPP states, to wit, Australia, Brunei, Malaysia, Peru and Vietnam. These agreements mean that appeals against the NZ government made by investors from those countries will only be heard by an ISDS panel if the NZ government consents thereto.

The economic benefits of the sort spruiked by the pro-TPP brigade, though somewhat smaller following the US withdrawal, remain. These consist mainly of access to new markets with a combined population of 480 million, including Japan, Canada and Mexico, to NZ exports. Tariffs will be eliminated on most goods – such as kiwifruit, fish and wine – and reduced on other things – such as beef and sheepmeat. In total, an estimated $222 million will be saved on tariffs annually. NZ’s Ministry of Foreign Affairs and Trade also argues that:

‘In addition to tariff liberalisation, the CPTPP will also help address nontariff barriers to trade in goods by reducing the time exports spend waiting for goods to clear customs, lowering compliance costs, and increasing predictability around other countries’ processes.’

And so, in the pro-CPTPP view, the opening of new markets overseas will give a very welcome boost to NZ’s principal export industries, such as agriculture and forestry. Demand for their goods will increase, allowing them ultimately to contribute to higher annual GDP growth and to provide more jobs for Kiwis.

The actual consequences of joining the CPTPP, however, look set to be much more mixed. Most assessments of its economic effects have been able to review the deal positively only because they employed the unrealistic assumptions of full employment and invariant income distribution, according to Capaldo and Izurieta (2016). They argue that increased competition with less developed economies, where labour is cheaper, will force NZ producers, ‘in order to preserve their market shares… to sell at lower prices, and thereby cut costs.’ Wages, being the main factor in total costs, will suffer.

In normal circumstances, the fall in nominal wages engendered by increased competition would be counteracted by a corresponding fall in prices, leaving wages unchanged in real terms. But the CPTPP also includes provisions that will incentivise companies to reduce the share of their incomes that is allocated to labour:

‘By facilitating cross-border capital movements, [the CTPP] will push firms and other borrowers in each country to provide higher returns in order to avoid losing investors to other countries. For a given level of economic activity, a higher profit rate requires a higher profit share of total income and, therefore, a lower labor share.’

Capaldo and Izurieta predict that the labour share of national income in NZ will fall by 1.45% and that the country will lose 6,000 jobs within ten years of the CPTPP’s coming into force. Real wages, then, will decrease, despite the probable fall in prices. Furthermore, the increase in annual GDP growth that is supposed to be one of the agreement’s major benefits is predicted to reach no more than 0.09%. This is because, although it is true that higher overseas demand will produce growth in exports, NZ will experience a similarly consequential fall in domestic demand due to the reduced disposable incomes of Kiwi workers.

If the economic benefits of the CPTPP are illusory, the threat it poses to the NZ government’s regulatory power is not. The first point to note is that the TPP provisions that have been suspended from the ultimate CPTPP text, such as the intellectual property chapter, could be reinstated if the US decides to re-join the partnership. In such a scenario, if most other CPTPP nations agreed to restore those provisions as a condition of US entry, a future NZ government could very conceivably be forced to give in to their demands and vote in favour of their reinstatement.

There are other dangers still present in the text of the CPTPP as it stands. Compulsory ISDS remains a point of recourse for companies from most other CPTPP nations, including Singapore and Canada, meaning that the NZ government faces the possibility of being sued for public policy decisions that negatively affect their investments in the country. This fact raises important questions concerning political and legal principles, such as why foreign investors should be given the right to sue NZ over government policy when domestic investors have no such right, and, indeed, whether any company at all should be allowed legal recourse against the legitimately made decisions of a democratic government.

In practical terms, the CPTPP’s ISDS provisions could hinder the NZ government’s ability properly to regulate crucial areas of the economy. Environmentalists are particularly concerned. Gordon Campbell warns that, if the government were to halt an infrastructure project, say, because of its potentially damaging effect on the local environment, it could face legal action from a foreign investor for the revenue lost due to that project’s cancellation. A similar scenario involving an American corporation has already occurred in the Canadian province of Nova Scotia under the ISDS provisions of NAFTA, showing that such an eventuality is not purely hypothetical.

Similarly, the CPTPP contains a requirement for NZ to raise the threshold above which a foreign non-government entity must get approval from the Overseas Investment Office to invest in non-land assets from $100m to $200m. This means that foreign purchases of NZ assets will be subject to even less public scrutiny and oversight than they are today.

Although the CPTPP is undoubtedly a far better deal for NZ than its precursor would have been, the purely economic benefits it promises are still insufficient to justify the other, negative effects it will have, economic, legal and political. An increase in annual GDP growth of 0.09% can hardly compensate for the contraction of wages, the job losses, the favouring of foreign over domestic investors, or the reduction of the government’s power to regulate the economy in the interests of people and of the environment. The CPTPP is, on balance, a bad deal for NZ.

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