The elusive single economic market

Colin James paper to Legal Research Foundation conference, Whose Law is it anyway? Harmonising Australian and New Zealand Business Laws Legal Research Foundation, Wellington 9 March 2007

Australia and New Zealand are family, heirs to British liberties and institutions. That enables us to do things together with little fuss. But we are also in important ways foreign. That gives us different perspectives and leads us to do things differently.

This family-foreign interplay is both oil and friction in the relationship. It suffuses and confuses, defuses and infuses the whole of the trans-Tasman connection. Nearly one in every 100 New Zealanders go each year to live in Australia and make themselves easily at home there because so much is the same, There is a parallel in those who left Gisborne or Gore for Auckland in the 1970s. But those left behind, especially parents, see each departure as estrangement — so much so that Don Brash made much of that anxiety in the National party’s election campaign in 2005.

The Australian arts scene, company managements and professions are stuffed with upwardly mobile ex-New Zealanders. Australians own large parts of the New Zealand economy and send emissaries to run branch offices and sub-branch offices; Australian public servants are liberally recruited to head government departments and commissions. But New Zealanders often resent what they see as Australian — by which they mean foreign — dominance.

New Zealanders would see an attack on Australia as an attack on New Zealand. They work hand-in-glove to stabilise Pacific island countries when they get into difficulties. But New Zealanders do not share Australians’ strong support for tight alliance with the United States. New Zealand could no more have joined the Iraq invasion than Australia could have not joined it.

Australia’s indigenous population is tiny and thus poses at most a moral issue for the majority (not even that for most of the majority). New Zealand’s indigenous population is large and thus critical to economic performance and social cohesion and is consequently accorded special status in the power structure. It also is an important and growing definer of our culture, by which I mean “who we are”.

The list is long. In every aspect of economic, social and political life there is both convergence and divergence between what Australians are and do and what New Zealanders are and do. The same goes for laws and regulations.

Our citizenries merge easily but in 2001 Helen Clark explicitly ruled out common citizenship.

Thus our political and court systems must remain distinct. But increasingly, because of that easy intermingling, each jurisdiction needs to cooperate with the other.

Our two countries’ national customs are near-indistinguishable to visitors from Asia. We share soap operas and rugby league excitements. But New Zealand increasingly feels like the Pacific island archipelago it is whereas Australia is a distinct continent against which the Pacific washes.

The economies are so deeply integrated and intertwined that re-segregation is near unimaginable and is in any case undesired, except by a tiny few. But they are regulated differently and differences are likely to remain a good long while yet.

The Australia New Zealand Closer Economic Relations Agreement (CER) both recognised the growing integration of the populations which cheap jet travel enabled and encouraged and promoted the economic integration that was bound to follow. CER was an instrument of convergence, explicitly of the two economies and implicitly of the two societies. “Closer relations” was the name chosen, not “free trade”. Free trade was achieved by 1990 and very nearly free trade in services followed over the next decade (1). By 1990 analysts, business leaders and politicians were talking of developing CER into a “single economic market” (SEM) in which, as New Zealand Prime Minister Sir Geoffrey Palmer enthused in 1990, “[t]he Tasman will not be a legal, administrative or financial barrier to the free flow of commerce”.

But running counter to CER have been currents of divergence. Some are unconscious — politicians and officials have simply gone their own way without checking their actions against CER and the SEM. Some are intentional or at least taken despite being aware of CER/SEM implications. The Australians’ sudden cancellation by fax in 1994 of a single aviation market was a low point. Moreover, while New Zealand is Australia’s biggest source of tourists and destination for offshore investment and fifth biggest export market, Australian officials have bigger prospective fish to fry in Asia and North America and sometimes explicitly say so, as Treasurer Peter Costello did in 2005 when pressing New Zealand on banking and finance regulation. The gains to Australia and Australian interests need to be clear before the full weight of Australian attention is brought to bear. That is asymmetry in action.

The result is that progress toward the SEM has been so uneven and halting that the New Zealand Finance Minister, Michael Cullen, and Costello could plausibly present it as a new goal at their inaugural annual bilateral meeting in 2003. Palmer’s “flow of commerce” is fluid but not yet “free” and is unlikely to be in the next 10 years.

That is because to bring about an operating environment in which no laws or administrators or regulators get in the way of doing business, as in the case of a national market, negotiators must surmount complex and difficult policy differences which are not susceptible to the sorts of stroke-of-the-pen solutions, such as abolishing tariffs and quotas on goods, which lead to free trade. They must deal, among other things, with:

* taxation;

* subsidies;

* non-tariff complications to trade in goods and services;

* mandatory quarantine and minimum medicines and other consumer safety standards;

* minimum standards for goods and services and professional, technical and trades qualifications;

* regulation of financial markets, securities, investment, company mergers and acquisitions, competition and consumer protection;

* company law and regulation, including registration;

* protection of intellectual property;

* court processes and enforcement of rulings;

* border controls and processes, including immigration and residency rules;

* and, of course, residual trade issues such as rules of origin.

When ministers and officials address these issues, many cross-cutting influences come to bear. Among the more prominent:

* national sovereignty, including control of the tax base and monetary conditions;

* nationalistic sentiment;

* asymmetry of size and interests;

* business competitiveness within the combined Australasian market;

* business competitiveness with the rest of the world;

* the potential for cooperation in third markets;

* the role of the Australian states and the continuing impediments to a completely seamless Australian market (an object lesson for SEM-makers);

* regulation design, notably the balance between prescriptive or generic regulation and compliance costs;

* special interests within each jurisdiction, including companies, lobby groups and consumer interests and political parties beholden to particular constituencies;

* harmonisation of legislation, regulation and regulatory processes, versus mutual recognition or “coordination and cooperation”;

* the establishment of joint agencies and, alternatively, cooperation between distinct agencies in each jurisdiction;

* widening the pool of expert advisers or adjudicators for highly technical regulation.

These factors limit how much closer the economic relationship can become and limits the mechanisms available to make it closer. It goes without saying, therefore, that economic union, the next step beyond a single economic market, is a long way in the future unless economic catastrophe drives New Zealand into Australia’s arms.

We do not, for example, yet have even a common external tariff, or full customs union. Special interests, particularly in Australia’s protected industries, have precluded that.

Nor do we have, or have even in prospect, a common currency. Sovereignty and nationalistic sensitivities in New Zealand rule that out — at least for as long as Australia insists, as Treasurer Peter Costello has to date, that it would have to be Australia’s currency and so both countries’ monetary policy would de facto be set by Australia’s Reserve Bank. (Though note that an Australian parliamentary committee report last year urged a common currency coupled with a joint Reserve Bank with “equitable” board membership.(2)) There are practical arguments, too: four-fifths of New Zealand’s merchandise trade is not with Australia; New Zealand’s most rapidly expanding sources of tourists are from elsewhere than Australia; the two countries’ commodity mixes and therefore terms of trade cycles are different; all of which would render Australian monetary policy inappropriate for New Zealand. Nevertheless, a study by Sir Frank Holmes and Arthur Grimes in 2000 found a majority in business and farming in favour of a single currency (3).

Economic union would require alignment of major elements of the two tax systems. While there has been some convergence, sovereignty on both sides of the Tasman precludes major alignment and will for some time yet.

So economic union is off the agenda and set to remain so for the foreseeable future, by which I meant at least the next 10 years. But what of the much less ambitious SEM?

First, note that convergence is becoming more common, at least in officials’ and ministers’ thinking, and unthinking divergences are becoming less common. This is partly organic — as the two economies integrate common rules become more commonsense. It is also due to an elevated interest by Australian Prime Minister John Howard (from the outset of his prime ministership in 1996 when he quickly repaired the damaged peak-level relationship) and Treasurer Peter Costello (from 2003 when he instituted annual meetings with New Zealand Finance Minister Michael Cullen and instructed the Treasury to take an active interest in the SEM process and thus bring it more centre-stage in the internal Australian political debate from where it had been parked in the trade portfolio and with individual ministers’ bilateral initiatives). There is now some momentum, even if still uneven and frustratingly slow — note the ambitious memorandum of understanding on “coordination” of business law signed in February 2006 which spans a wide range of topics. (4) It helped, too, that antipathy to New Zealand because of its defence policies mellowed in the wake of New Zealand’s active involvement in East Timor, Afghanistan and the Solomon Islands.(5)

Second, New Zealand ministers have become more willing to align or approximate New Zealand law with Australia’s, beginning with competition law early this decade and now, for example, a factor in tax law (within limits). In drafting new bills and regulations, New Zealand ministers and officials do often take note of Australian law and practice, at least as an option.

There are sovereignty limits to tax convergence: Australia’s unwillingness to agree to full mutual recognition of tax franking/imputation of dividends attests to that. Nevertheless, New Zealand is about to align its company tax rate with Australia’s recently lowered rate, despite the fact that in total Australian companies pay in addition capital gains and payroll taxes (not to mention compulsory superannuation supplementation) which are not levied in New Zealand. Revenue Minister Peter Dunne, in a speech on 2 March, set out a “goal of being competitive with Australia” in tax rules and invited his audience to “see an Australian focus in a number of our reforms which are under way”. Officials’ proposals for revamped life insurance law “have certain conceptual similarities to Australia’s rules” and the current review of tax on companies’ offshore income “takes as its starting point the Australian rules”, particularly the reduction of withholding rates in double tax agreements, even though that is “a fundamental departure from the principles underlying the current New Zealand tax system”(6). A future National-led government is likely to adopt the Australian practice of tax concessions to encourage private health insurance and schooling and to lower personal rates and lift thresholds. Perhaps I should add that the traffic has not been all one-way: Australia’s GST is modelled on New Zealand’s though not as clean.

The third factor facilitating convergence is that New Zealand ministers’ and officials’ willingness to consider alignment or convergence represents a relaxation of — or, depending on your point view, a lapse from — the principle of light-handed generic regulation, which contrasts with Australia’s often more prescriptive, heavy-handed regimes. This relaxation has been matched on the other side by John Howard’s move toward lighter regulation in some areas, notably labour. This has reduced the potency of an argument that from the 1980s onward militated against alignment for the sake only of trans-Tasman transactions, an argument still mounted by some (including myself): that regulation should not diminish international competitiveness and that if alignment with Australia does that, the gains in trans-Tasman trade from alignment are illusory.

This was part of the objection to the proposal by Australian Treasurer Peter Costello in February 2005, at the behest of two Australian banks operating in New Zealand, for a joint regulator of the two countries’ banking and finance industries or at least a harmonised regulatory system: New Zealand’s prudential surveillance puts the onus for compliance on bank directors; Australia’s puts it on the Australian Prudential Regulation Authority. There were also practical objections. Costello’s proposal would have allowed the two banks (which, with two others, dominate New Zealand’s banking) to escape a requirement by the Reserve Bank of New Zealand for full incorporation, with a separate board, and back office support in New Zealand to enable the protection of New Zealand customers in the event of difficulty (at a cost estimated by the Australian Treasury of $A15-30 million a bank (7)). New Zealand Finance Minister Michael Cullen initially expressed sympathy but over time was persuaded by RBNZ and New Zealand Treasury officials to reject the approach in favour of cooperation between the two regulators. There were stormy altercations between officials and Cullen, who feared rejection would cost him political capital with Costello. And indeed Costello did warn that if this “low-hanging fruit” could not be plucked, he would focus his energies on other countries.

The fourth force for convergence is that there is greater and wider interest in Australia than in the 1990s. This is in part because trans-Tasman alignment can usefully stimulate alignment among the states and the creation of the genuinely national market which has eluded Australia since federation — at a cost of $A20 billion a year, according to the Business Council of Australia (8). The Australian parliamentary committee’s report devoted as much space to state-by-state legal divergences as to trans-Tasman legal divergences. In addition, joint action sometimes suits Australia’s wider ambitions for influence in the Asia-Pacific. Australian officials hope standards set by the proposed Trans-Tasman Therapeutic Products Authority might be adopted or observed in south-east Asian jurisdictions. Its supranational nature enhances that possibility.

What are the mechanisms for improving trans-Tasman convergence? Essentially they are:

* a joint supranational regulatory agency operating under identical or near-identical legislation in each country; so far, judging by the fact that food safety and therapeutics (but not banking) have been negotiated, these may be most suited to regulation which requires a high degree of scientific expertise and the two countries can pool their limited resources; next up might be a joint patents office, favoured by Michael Cullen; genetic modification control would logically be another, though special cultural considerations in New Zealand might rule that out.

* separate regulatory agencies operating under closely similar laws and recognising and enforcing each other’s decisions and cooperating with each other;

* extension of an Australian regulatory agency’s jurisdiction to cover New Zealand, as was mooted but not in the end adopted for licensing immigration agents;

* alignment of the law of one country with the corresponding law of the other, as, for example, New Zealand broadly did with competition law in the early 2000s, accounting standards more recently (after a unilateral change by Australia) and in its recent revision of insolvency law; the Australian parliamentary committee mooted, but dismissed as impractical for sovereignty reasons, an ideal of a single law enacted by one Parliament on behalf of both;

* cooperation between the courts which Michael Cullen, as Attorney-General, listed as including: the enforcement by each country’s court systems of the other’s non-money judgments and tribunal orders; enforcing criminal fines for regulatory offences “when there is a mutual interest for doing so”; extending the trans-Tasman subpoena regime to allow a serving of subpoenas for criminal proceedings on witnesses in the other country; allowing lower courts to grant leave to serve a trans-Tasman subpoena in lower court proceedings; and obtaining interim relief in one country in support of civil court proceedings in the other.(9)

* cooperation between other agencies administering different laws, as the Australian Securities and Investment Commission and the New Zealand Securities Commission and the Australian Competition and Consumer Commission and the New Zealand Commerce Commission increasingly do and the banking and regulatory authorities are to do; work is well advanced on a “charter” for cooperation generally between comparable regulators on each side of the Tasman;

* mutual recognition by each country of the other’s regulatory requirements, as, for example, securities issuance documents;

* mutual recognition of standards for goods and services and for professional and skills qualifications, under the 1998 Trans-Tasman Mutual Recognition Agreement, which is periodically expanded;

* changing administrative rules practices, for example, streamlining customs and passenger clearance procedures and agreeing quarantine procedures. This is a large and diverse smorgasbord from which negotiators can choose. Full harmonisation is not always necessary or even desirable. Often mutual recognition and cooperation between agencies will suffice.

It also should be set in a wider picture of cooperation and convergence. For example:

* The two countries cooperate closely in many offshore forums. They are jointly negotiating a free trade agreement between CER and the Association of South-east Asian Nations.

* The two countries agreed their maritime boundaries with each other in 2004.

* Science and technology cooperation is extensive, spurred by a bio-technology agreement reached between New Zealand, New South Wales, Queensland and Victoria in 2004 and a New Zealand contribution to a synchroton in Victoria. By 2005 some 30 per cent of New Zealand’s research community had links with Australian counterparts.

* A joint Australia New Zealand School of Government, aimed at both researching, and awarding degrees in, public policy and public management was set up in 2003 by a consortium of the two national governments, three state governments, and 10 universities and business schools. A world first, it comprises a form of virtual institution, elements of its degrees being taught in different institutions. The aim is world-class professional education and training for public servants, “modelled on the Kennedy School of Government at Harvard University”.

So is the SEM assured? Is it just a matter of time? The Australian parliamentary committee gave the impression it thought so and even said “the strong ties between the two countries … suggest that an even closer relationship, including the possibility of union is both desirable and realistic” and urged the two countries’ Parliaments to establish a “trans-Tasman standing committee to monitor and report annually to each Parliament on appropriate measures to ensure ongoing harmonisation of the respective legal systems” and “explore and report on options that are of mutual benefit” (10).

But such sanguinity needs to be set in the context of continuing divergence or at least distance.

* On the international front, Australia refused to join New Zealand in a single closer economic partnership agreement with Singapore, Chile and Brunei and opened negotiations for a free trade agreement with the United States without telling New Zealand in advance.

* Australia did not join the Kyoto protocol on climate change. New Zealand joined.

* A Biosecurity Australia ruling that allows entry for New Zealand apples — previously banned because of fireblight infestation, even though international scientific studies showed mature apples did not carry the disease and a World Trade Organisation ruling required Japan to remove its similarly based ban on imports of apples from the United States — carries so many conditions that New Zealand apple-growers and ministers believe it amounts to a continuation of the ban. In 2005 New Zealand took the issue to the World Trade Organisation’s sanitary and phytosanitary committee as a first step to a formal request for a WTO trade dispute ruling, the first such action by either country against the other. Other commodities subject to bans are trout both ways, salmon from New Zealand and some Australian tropical fruit liable to restriction under the Hazardous Substances and New Organisms Act, which New Zealand undertook in 2004 to remedy.

* New Zealand has liberally agreed visa-free entry for tourists. Australia allows only New Zealand citizens and residents visa-free entry. This has been a sensitive issue for more-security-conscious Australia.

* And for as long as the tax regimes and rates are as different as they now are they will affect the competitiveness of the two countries’ businesses. * The Australian parliamentary committee identified a number of other divergences, including telecommunications, copyright law and different statutes of limitation (some work is beginning on this). It suggested a number of matters on which courts could cooperate more.

Nevertheless, the story the past two decades tell is more of convergence than divergence in matters that affect doing business. There is momentum and it is one-way. This doesn’t promise a single economic market soon, still less a common external tariff or common currency or economic union. But in time an SEM is more likely than not, achieved through a mixture of mutual recognition, cooperation and, to a lesser extent harmonisation and joint agencies. And as the two countries get more experience of and comfort with joint agencies, we may in a decade or two be ready to move on from an SEM to economic union, with a joint Reserve Bank.

But even that does not presage confluence between the political systems, still less federation. That cannot be ruled out absolutely in the longer term but it overlooks the foreign dimension of the family-and-foreign nature of the relationship, especially the demographic and cultural differences between continental Australia and Pacific New Zealand.

Might that deep divergence in time reverse the uneven progress towards an SEM? Again, conceivably yes. But to place weight on that possibility overlooks the family dimension of the family-and-foreign nature of the relationship.

These two dimensions will continue to operate in tension. They will continue to give the relationship its special character: very close and becoming more so but also clearly different and becoming more so. It may not be pretty but it is eminently liveable.


Should CER and SEM be seen as process, rather than end-states? The word “closer” in CER implies process rather than an endpoint and encompasses all “closer” points up to economic union. SEM does imply a fixed point on that journey. But the negotiators at the conference in their paper described what they were seeking as a set of processes, ways of overcoming differences through a variety of mechanisms, rather than a single regulatory environment.

I will explore this in a future New Zealand Herald column but would meantime welcome feedback.


1 Those outstanding are coastal shipping on both sides of the Tasman, television ownership, third-party insurance, and aspects of postal services in Australia and the Airways Corporation’s air traffic control monopoly in New Zealand.

2 House of Representatives Standing Committee on Legal and Constitutional Affairs, Harmonisation of legal systems within Australia and between Australia and New Zealand (The Parliament of the Commonwealth of Australia, Canberra, November 2006), p35

3 Arthur Grimes and Sir Frank Holmes, with Roger Bowden, An ANZAC Dollar? Currency Union and Business Development (Institute of Policy Studies, Victoria University of Wellington, 2000)

4 Conveniently summarised by the Australian Treasury in its submission to the Australian parliamentary committee as “cross-recognition of companies, financial product disclosure regimes, cross-border insolvency, stockmarket recognition, consumer issues, electronic transactions and competition law” — House of Representatives Standing Committee on Legal and Constitutional Affairs, op cit, p38

5 Colin James, From the Pacific; a New Zealand perspective on Australia’s strategic role, (Australian Strategic Policy Institute, Canberra, 2006)

6 Hon Peter Dunne, Minister of Revenue, speech to the International Fiscal Association conference, Christchurch, 2 March 2007

7 House of Representatives Standing Committee on Legal and Constitutional Affairs, op cit, p8

8 House of Representatives Standing Committee on Legal and Constitutional Affairs, op cit, p6

9 New Zealand Herald, 21 July 2005.

10 House of Representatives Standing Committee on Legal and Constitutional Affairs, op cit, pp33-34