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Joint study: strengthening economic relations between NZ and Australia

Thursday 19 July 2012, 5:09PM

By Auckland Chamber of Commerce

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Emerging policy action areas were identified in a presentation last month by Gary Banks, Chairman of Australia’s Productivity Commission.

Mr Banks’ presentation to the Committee for Economic Development in Australia (CEDA) State of the Nation Conference on 18 June was prepared as part of the joint study by the Australian and New Zealand Productivity Commissions on ‘Strengthening economic relations between Australia and New Zealand’.

In it he said the potential policy initiatives to advance the ‘four freedoms’ framework that have been featuring in discussions on both sides of the Tasman were:
First freedom: a Customs Union?
Second freedom: more integrated transport services?
Third freedom: harmonised business taxation?
Fourth freedom: even freer labour movements?

The potential action areas are part of a wider discussion to identify areas for further integration, building on those achieved since the Closer Economic Relations (CER) agreement between Australia and New Zealand that was signed nearly 30 years ago.

The Productivity Commissions were asked in April to jointly study the options for further reforms that would increase economic integration and improve economic outcomes.  Since then, the Commissions have undertaken consultations with government, business and community groups as well as receiving around 60 submissions.

Mr Banks said that while a focus remains on trade in goods and services, and in the movement of capital and labour, the ‘four freedoms’ framework also encompasses freedom of knowledge and integration or interaction of government functions.

He acknowledged that economic integration has been getting a bad press of late, courtesy of the European debt crisis. “But it is important not to lose sight of the benefits that greater integration can bring for living standards in the countries concerned — by reducing transactions costs that inhibit the exchange of goods, services, capital and technology and the movement of people (for work and tourism).”

He said that while much economic integration is driven by the actions of profit-motivated businesses and individuals, governments can do things to reduce transaction costs directly (like reducing tariffs) as well as prompt markets to drive costs down (for example, by making it easier for new firms to compete).

Mr Banks said there are lots of items to consider, and potential reforms can be screened according to their:

  • width of reach (number of entities and/or value of activity affected)
  • depth of reach (degree to which entities are affected and/or compliance and other costs of the current arrangements)
  • implementation costs
  • how costs and benefits are shared between the two countries (with higher priority assigned to those that produce clear net benefits for each) including any impacts on ‘third country’ relationships.

“Evidence needed for this is coming from submissions, consultations, previous studies or reviews and from our own research.”

The Commissions are also looking out for impediments that, while not imposing great costs, may be causing unnecessary irritation and going against the spirit of the ‘domestic like’ experience between the two countries. “It has been suggested to us that current mobile phone roaming charges, departure taxes and bank transfer fees all fall into this category.”

Mr Banks said that one message which has come through from some consultations is that progress on integration seems to have lost momentum. “There is recognition that much has been achieved, but also indications that more could be.”

Results from closer relations over the past 30 years are reflected in current economic dealings. For example:

  • the value of two-way merchandise trade between Australia and New Zealand has grown at an average annual rate of 8 per cent, which is higher than growth in Australia’s trade overall
  • services trade via commercial presence in the partner country has expanded greatly in sectors such as banking and telecommunications
  • the New Zealand born population in Australia (a group that has a high workforce participation rate) has nearly tripled

 

 

Measuring the net benefits of reforms can be difficult, however, though Mr Banks maintains it is possible that CER helped engender reform to broader policy settings in Australia and New Zealand.

He says that it has been suggested that the CER helped to change opinions about trade protection for manufacturing and paved the way for unilateral reductions in tariffs generally, particularly in New Zealand (Scollay, Findlay and Kaufmann 2011).

“In this way, and unlike some other agreements, CER appears to have acted more as a ‘building block’ than ‘stumbling block’ in the pursuit of wider integration.  The quantitative studies nevertheless underscore an important point: the ultimate test of policy initiatives across the Tasman is not whether they simply increase mutual trade or investment, but whether in doing so they yield net benefits overall for our populations, accounting for broader regional relationships and interactions.”

“That is the test that the two Commissions will be applying in the agenda we ultimately propose.  This will not be straight forward, since, looking beyond the current work program, it is clear from our consultations and work thus far that much of the ‘low hanging fruit’ has been picked. Extending or deepening the trans-Tasman integration agenda will require tackling some more complex and contentious areas of policy and regulation.”

One area in which both Commissions agree, however, is that a Political union is clearly no longer a live option.  “That political union is a step too far is therefore generally accepted.  However a less recognised implication is that this also rules out or limits the scope for key elements of economic union as well.”

Mr Banks said this was underlined by the reaction on both sides of the Tasman to the brief mention in the Issues Paper of a common currency.  He said that this idea had been raised and rejected more than once in the past.

“A key argument against it is manifest in Australia’s recent mining boom and the appreciation of Australia’s dollar relative to that of New Zealand.  Countries with different economic structures and conditions will face differential pressures for adjustment through their exchange rates.”

“Even if two countries had identical economic structures, and therefore identical ‘shocks’ through trade, their fiscal and monetary policies may diverge for  reasons that have more to do with democracy than economics,” he said.

A draft report from the Joint Study is due in approximately two months, with a final report from the study due to be submitted to both governments in December 2012.

The official title of the study is “Impacts and Benefits of Further Economic Integration of the Australian and New Zealand Economies - Joint Scoping Study by the Productivity Commissions of Australia and New Zealand”.

For more information and to read submissions, please click here.