Can you have sex with your clothes on? Some economic strategists seem to think so. Since political union with Australia is off the agenda, economic union is now being pushed.
We should give “absolute priority to complete economic union with Australia”, Victoria University Institute of Policy Studies director Arthur Grimes told the “Changing Gear” economic jointly sponsored by his institute and Business New Zealand last Thursday.
His argument was that this country is simply too small. Firms can’t get big enough here and too many freeze with fear when the next step in growing is exporting — even to Australia, with its similar business culture and tariff-free access through CER, the closer economic relations free trade agreement.
Grimes last year produced, with veteran trade expert Sir Frank Holmes, a study that canvassed currency union with Australia. A survey of business for that study found more in favour than against in every business sector.
That was surprising, though maybe it should not be. As this economy has become locked into the Australian economy through CER, the regulatory and administrative differences have become increasingly apparent to businesses here doing business there. The tiny capital market here and different tax rules are also a drawback.
In short, the playing field is not level and incremental improvements under CER are too small and proceeding too slowly. For small businesses currency fluctuations are too scary. Economic union, like currency union, sounds attractive.
But what would “complete economic union” mean?
Politicians here rejected currency union and few Australians summoned up more than a yawn. Grimes’ and Holmes’ preferred option in the event of currency union, a joint “anzac” currency with a joint Reserve Bank on which New Zealand would have some but not equal representation, was almost universally rejected across the Tasman. If we want currency union, the message was, we will have to adopt Australia’s.
The message was clear: if New Zealand wants “complete economic union”, it will have to adopt Australia’s rules. Grimes basically agreed in his comments to the Changing Gear conference — though reserved the option not to if “absolutely sure the New Zealand system is better”.
So “complete economic union” — as distinct from incremental improvements in CER — would involve sweeping changes to our law. We might manage some concessions from Australia, though that would be difficult. But we would have to assume we would mostly end up with Australia’s laws.
Among the changes would be:
* a common external tariff, which would, for example, price some industry components higher and raise consumer prices in some products, most notably cars, which are protected in Australia — though Australia is reducing tariffs, so those differences are also reducing;
* a common or at least similar immigration programme, which the government here has recognised is an economic as much as a social issue; this might affect our Pacific immigration programme;
* common labour laws, which are more restrictive in Australia, even after the changes here last year and still to come next year;
* common competition and securities laws and administration, predicated on a single Australasian market;
* common corporate governance laws and administration, which would in some cases add to business costs; also common standards;
* common corporate (and maybe personal) taxes, including concessions, which would seriously limit spending policy options here;
* a common currency, which would mean accepting the Australian currency and interest rates and would put both more weight and constraints on fiscal polic here;
* possibly a raft of lesser issues which might become more prominent as bigger issues are dealt with, for example, accident compensation.
This list is not politically realistic, so Grimes can safely stay in the realm of theory, at least for the time being. Though the government has been transplanting some Australian rules into New Zealand competition and securities law, has welcomed a common stockmarket and moved closer to Australia in labour law, it will not relax control of tariff, immigration, labour, tax and monetary policy because those items, like currency union, are seen as matters of political sovereignty.
Sovereignty has been limited already by CER, globalisation and hundreds of international treaties. So one day trans-Tasman economic union might be politically possible. But that is some way off.
In any case, economic union with Australia begs a bigger question. Australians think their economy is too small. So why should New Zealand simply join a less small economy than its own?
And there is an eggs-in-the-basket issue. A central object of trade policy for the past 30 years has been to diversify the range of products exported and the range of countries exported to. This has persisted through changes in government and economic policy and has been remarkably successful.
Economic union might reverse that by adopting rules which reduce economic competitiveness with the rest of the world and by diverting to Australia trade that might go elsewhere.