Maximizing the benefits from free trade agreements: Lessons for New Zealand

Free trade agreements (FTAs) now play an increasingly significant role in international trade. The removal of tariff and non-tariff barriers through a bilateral FTA could promote and facilitate trade in both directions by increasing the opportunities available to exporters from both countries. Beyond opening up important new market access opportunities, these agreements may also deepen economic integration with trading partners and thus strengthen trade and economic relationships. Drawing on conventional and new trade theoretical approaches, this thesis attempts to suggest that new trade theory might be more superior to shed light on policies to secure greater benefits from FTAs. There is now an extensive body of literature analyzing the economic impacts of FTAs. In common with a broader division in trade theory (Rangasamy 2003), this literature may be classified into two categories; namely, that informed by conventional trade theory (which has a neo-classical foundation) and new trade theory. The conventional approach is one grounded on the theories of trade creation and trade diversion pioneered by Viner, and based on the assumptions of perfect competition and constant returns in production, this strongly emphasizes a neutral policy environment to ensure the gains from trade and FTAs are reaped. The new trade theory is based on an opposing set of assumptions emphasizing the existence of imperfect competition and economies of scale (see e.g. Dixit and Norman 1980, Krugman 1980, 1981, Helpman, 1981). In this view, neutral incentives and laissez faire policies are not always beneficial to industrial development as advocated by conventional trade theory. On the contrary, government policies play an increasingly important role to ensure the gains from trade and FTAs are realized. Drawing on the perspective of new trade theory, a number of important policy suggestions have been put forward to improve the gains from FTAs, including profit-shifting, innovation and R&D, and industry clustering arguments. In addition to these theoretical insights, the practical experience of FTAs in Singapore may present further lessons. The available evidence suggests that FTAs have brought tremendous gains in terms of trade and GDP growth, welfare improvement, as well as structural changes. The Singaporean government has put in place an extensive policy framework to ensure that these benefits are maximized. A close examination of the policy mix that they have pursued should therefore have important implications for policy makers in New Zealand. In light of the theoretical framework and empirical findings, the present thesis makes a number of policy suggestions with regard to the maximization of the long term benefit of FTAs in New Zealand economic settings. These suggestions aim to deal with the impact of FTAs and enable New Zealand to compete more effectively for profit in an FTA environment