Some movement in the glacier

Colin James on CER for Management for October 2003

No 2 has to try harder. That sums up CER on its 20th birthday. No 1 has better things to do — though now maybe, just maybe, it might cast a glance or two No 2’s way.

The first 10 years was vintage stuff. New Zealand went from dipping a quivering toe in the water of competition with Big Brother manufacturers to jumping in the deep end — and found it could swim. Trade boomed both ways. CER became the world’s star free trade agreement.

Then Australia lost interest. Once New Zealand had opened up, its small market offered limited new gains thereafter — far fewer than fast-growing Asia and rich United States.

So far did New Zealand slip in Australian national consciousness that eminent Australian journalist Paul Kelly, in a book in 2001 marking 100 years since federation, could give New Zealand only seven fleeting references and not mention CER at all.

Ministers on this side of the Tasman complained privately they would get their counterpart minister to take an interest in something only to find Australian officials then buried it. Each year the ministers met, as required. Each year they issued a ritual communique. Each year little happened.

There were some small, though significant, developments. But CER moved at a snail’s pace. There was a new fluffing of feathers when Labour took office in late 1999 and Trade Minister Jim Sutton got business involved but Australian officials stayed on their go-slow.

Until Michael Cullen took an interest. He has now set up regular meetings with Peter Costello. And he has got movement on “tax triangulation” — partial recognition by both countries of each other’s company dividend imputation credits (known as “franking credits” in Australia). That had been supposedly on the action list for a decade.

Is this the start of something big? Should we start dreaming of a “single market”, operating under one set of rules? Of a common currency? A common external tariff? After all, Europe has all those and CER is supposed to be a “state-of-the art” agreement, is between two countries, not 25, and those two countries have deep Anglo cultural ties.

The answer is no — and yes. But be prepared to dream patiently.

First, register some big dividers.

* The two countries have starkly different geologies, geographies and climates and depend for a living on very different commodity mixes.

* The shared 75 per cent British genealogy apart, the two societies are demographically very different. New Zealand has a large polynesian dimension with growing cultural, political and economic influence.

* The upside-down twins at the bottom of the world see the world very differently. Australia worries about next-door Indonesia and snuggles up to the United States for protection. New Zealand basks in the “distance of tyranny” (to turn Australian historian Geoffrey Blainey’s famous phrase on its head) and seeks security in numbers.

* Australia is five times bigger and its people one-fifth richer. New Zealand is in a sense a province to Australia’s metropolis, the first hop upstream for fish looking for a bigger pond. Australia has a habit of coopting New Zealand movie stars and directors, singers, artists, football players and executives who win international attention. A newspaper feature earlier this year called Colin McCahon Australasian, on the strength of his one fleeting trip across the Tasman.

Size and wealth cause Australians to feel superior or dismissive and New Zealanders to be resentful or noisily attention-seeking. That is unhealthy.

And business in each country views the other differently. The New Zealand Institute of Economic Research (NZIER), in a report in August for the Australian-New Zealand Business Council (ANZBC), found most Australian businesses it surveyed see this country as a place to generate increased sales, a sort of additional state, while New Zealand firms see Australia as an export market, a stepping stone towards third markets.

This multiple asymmetry means New Zealand has to make the running to get changes in CER.

CER was the product of Australian frustration with New Zealand pettiness in the pre-1983 trading arrangement (Nafta) and concern that it might become an economic basketcase. With those two worries fixed, Australia could again turn its attention elsewhere. Now New Zealand impinges on Australian consciousness mainly when it is a nuisance: Ansett; defence disappointments; Kiwis on the dole; (increasingly rare) sporting wins.

Now for the good news.

Helen Clark and John Howard have both determinedly fashioned a good relationship. They agree to differ and, thus freed from the negatives, agree on much. Clark helped Howard out with the Tampa refugees. Howard stayed mum on her Iraq anti-war statements. Clark won’t complain at Australia’s go-it-alone on a free trade agreement with the United States and Howard puts in a word for New Zealand coat-tailing his deal.

And there is movement on CER.

Note, first, what CER now is. It has long since moved beyond being an instrument of free trade. It is an instrument of economic integration.

The CER ministerial meeting on 28 August to mark the twentieth anniversary pronounced that the two countries are “bound together … by the depth of our labour market integration, value of cross-investment, integration of our banking and broader financials services markets, shared public and private institutions, integrated companies and the breadth of business and personal networks and daily interactions”.

But as the formal border — tariffs and quotas and the like — has been progressively dismantled, it has exposed blockages behind the border. To develop a true “borderless” market requires common or harmonised or compatible tax and regulatory regimes.

These are hard issues: competition and securities law, business and other regulation, tax, court jurisdiction, phytosanitary rules (which have been used, in the face of scientific evidence, to keep apples out of Australia), migration (on which there was a step backwards in 2001) and investment — not to mention joint development of new policy.

High on that list is an matter which is both a border and behind-the-border issue: a rules of origin regime which is increasingly anachronistic in a world of freer trade. CER requires at least 50 per cent Australasian content for duty-free entry, which inhibits some, mainly New Zealand, manufactured exports. Both countries’ recent trade agreements with Singapore set much lower levels — 40 and 35 per cent.

New Zealand has tried to get movement from Australia for many years. At the last minute at the ministerial talks this August, Australia gave ground. So there will be an immediate “incremental” change, to allow most components to qualify. In return New Zealand agreed better treatment of outsourcing by Australian companies. And there was agreement to completely overhaul the regime by June next year.

Tax triangulation, rules of origin: sounds like movement at last. But don’t be so fast. “Incremental” is the CER creed.

So there will be a “report” on how mutual recognition by each country of the other’s goods standards and professional qualifications, introduced in 1998, is going. There is at last, after much Australian foot-dragging, legislation before both Parliaments for mutual recognition of aviation certification. Discussions on mutual recognition of securities offerings (share and bond floats and the like) are “well advanced” and a discussion paper is due on November 30. There is now limited cooperation between the two countries’ financial markets and competition watchdogs and accounting standards boards.

The long overdue need for a joint competition approach — or joint competition authority — has been highlighted by the drawn-out two-legged scrutiny of the Qantas-Air New Zealand proposal.

Some would go further. The NZIER paper for the ANZBC urged common regimes for economic activities now specifically regulated: “The candidates might include: retail, airlines, agri-businesses, mining, utilities (electricity, gas, water, telecommmunications), banking and insurance.”

David Goddard, a Wellington lawyer specialising in trans-Tasman legal issues, agrees. In a paper to a law conference in July he suggested a single patents office, besides single competition and securities regulators.

Goddard also wants “a fundamental reappraisal” of the rules applying to civil cases. Now “we treat each other in essentially the same way as any other country”.

But why stop there. Goddard argues for a “strong presumption of mutual recognition of each other’s business regulatory regimes”, backed by a joint tribunal of officials to rule on whether a regulation prevents or impedes trans-Tasman movement of goods.

And he wants officials to work jointly on new legislation or regulation, particularly when implementing an international model, and make a single report to the two countries’ ministers. Goddard thinks the countries’ respective law commissions could jointly research law reform issues.

There is an informal basis for this now. Public servants in Wellington have ready and frequent contact with counterparts in Canberra and state capitals, sometimes at relatively low levels.

Goddard’s hopes are for the future. But there is one important joint development: joint regulatory agencies for technical or safety matters.

If you believe, as some scientists do, that the Environmental Risk Authority cannot draw on enough scientific expertise to make safe judgments, it makes sense to join forces with a close-by nation that has a bigger pool of scientists.

If you believe, as Immigration Minister Lianne Dalziel does, that it is not cost-effective to set up a regulatory agency for immigration consultants, it makes sense to seek, as Dalziel is, the extension of the jurisdiction of the Australian Migration Agents Registration Authority.

There are benefits for Australia, too. Spreading the load, even to a smaller neighbour, spreads the cost and adds to the pool of expertise.

So far there is only one joint regulatory agency, the Food Standards Authority of Australia and New Zealand, with Australia very much the senior partner in numbers on the ministerial panel. A second, on therapeutics, is nearing finality, with one-to-one ministerial representation. It is most unlikely these will be the last.

Multiply the numbers over the next 10 -20 years and stir in integrated competition and securities watchdogs and a single sharemarket — and a joint Reserve Bank, with a common currency, is imaginable.

It is not on the cards now because the very idea cuts too close to the sovereignty nerve on both sides of the Tasman: Australia won’t countenance a joint Reserve Bank board, for example, nor a new joint currrency. But in 15 years a joint board might well be acceptable to Canberra and New Zealanders might have got used enough to working in harness with the Australians not to feel they are losing control of their economy.

And then, only then, might federation be on the cards — though it is hard to see why either country would bother if a genuinely borderless market is achieved.

And would that borderless market by nirvana for New Zealand businesses?

First, remember that there is a difference in business culture.

NZIER found that Australian firms which thought New Zealand was just another state market where they could roll out the same sort of business plan previously used they made costly errors. “Hard experience suggested that understanding the various business aspects associated with the market (how to motivate employees, the way businesses interacted with government and the approach customers take to the buying process) were vital in succeeding in New Zealand.”

Conversely, New Zealand firms which thought Australia was just a bigger New Zealand also struck major difficulties with the more complicated regulatory structure and lack of understanding about the motivations of Australian employees and the type of product that would be successful there.

And remember, too, that four-fifths of exports go to other countries. Australia is not the answer to all prayers.

But there is a prize nonetheless in making progress to a “borderless market”. NZIER conservatively estimated the economic gain to this country of true borderlessness as between $256 million and $576 million, against initial one-off costs of $64-$128 million.

And that’s without giving up sovereignty or black-kitted sports teams. Not a bad deal. If the Aussies can be persuaded. Which, if history is a guide, will take some doing, despite recent signs of movement. No 2 has to try harder.