Closer economic relations between Australia and New Zealand: specialsiation, competitiveness, complementarity

Economic Papers (Economic Society of Australia), Sept, 2003 by Elizabeth Petersen, Rukmani Gounder

1 Introduction

The Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), popularly known as the CER Agreement, came into effect on 1 January 1983 (see Department of Foreign Affairs, 1983). The initial objective to create a conventional free trade area, involving the removal of all border restrictions on trade in goods, was achieved ahead of schedule in 1990 (see Lloyd, 1999). This means that all products originating from Australia and New Zealand are free of tariffs, quantitative restrictions (e.g., import licensing), antidumping measures and safeguard measures. All export subsidies and incentives on trade between the two countries have been removed. Furthermore, ANZCERTA has provided for the removal of administrative and 'behind-the-border' impediments to trade and investment flows, such as liberalising and integrating government purchasing procedures. However, there are still some restrictions in place. Some significant service industries are exempt from free trade across the Tasman Sea, (1) there is some double taxation of some dividends paid to shareholders, there is no provision for free movement of capital, and quarantine provisions require amendment (see Lloyd, 1999). However, all things considered, the Australian and New Zealand governments have viewed ANZCERTA as a success story as the economies have become increasingly integrated, trans-Tasman exports have risen substantially and cooperation in areas such as business laws has been strengthened (see Duncan et al., 1999). ANZCERTA has received international commendation for its speed and the broad nature of its liberalisation.

It was expected that ANZCERTA would bring benefits to both countries through taking advantage of geographical ties and production complementarities. A number of studies have considered the broad composition and size of trade flows and the Agreement's effect on foreign direct investment and migration (e.g., Ratnayake and Townsend, 1999), Bollard and Thompson (1987), Nana and Poot (1996), Scollay (1996)). However, to the authors" knowledge, no study has considered the impact of the agreement on each country's competitiveness and specialisation. The latter can be measured through comparative advantage, the key determinant of international trade flows. While international trade theory has been enriched with the inclusion of technology, economies to scale of production, and imperfect competition in product markets as determinants of trade, the core trade theory of comparative advantage remains an important measure. However, trade and other economic policies of governments influence comparative advantage. Moreover, taxes, subsidies and other trade barriers or incentives distort trade flows. The effects of a country's changing comparative advantage and the offsetting government policies are reflected in the country's competitiveness and specialisation in international trade (see Hossian, 1997).

The objective of this paper is to examine the impact of ANZCERTA on Australia and New Zealand's specialisation and competitiveness in international trade. They are measured through revealed comparative advantage and market shares, respectively. Changes in complementarity are also assessed to quantify the degree to which the two countries have exploited their comparative advantage in response to the Agreement. The structure of the paper is as follows. Section 2 presents a brief review of trade liberalisation theory and develops the hypothesis that New Zealand stands to benefit more than Australia from ANZCERTA due to the relative sizes of the economies. This hypothesis is based on the assumption that small countries stand to benefit more than larger countries from free trade agreements. Section 3 presents a short history of trade liberalisation and economic performance of the two countries. It is argued that in the 1990s Australia's policy reforms have resulted in stronger economic activities and hence, may effectively counteract the relatively greater benefits of ANZCERTA to New Zealand. Section 4 presents a qualitative analysis of the impacts of ANZCERTA on competitiveness, specialisation and complementarity of bilateral trade between Australia and New Zealand. There is evidence that, overall, New Zealand increased its specialisation, competitiveness and complementarity in trade relative to Australia between 1985 and 1995, confirming our hypothesis. However, the trend is reversed subsequent to 1995. This difference may be due to the effectiveness of each country's economic policies in allowing the private sector to search out and exploit their country's comparative advantage that facilitates productivity growth and export gains.

2 A Brief Review of Trade Liberalisation Theory

Cross-country experiences since World War II have many lessons to offer regarding the benefits of trade liberalisation. For example, the remarkable increases in affluence in East Asia through the 1980s and 1990s were characterised by openness in trade and high levels of investment not observed in many other economies (see Bhagwati, 1997). While it is generally, though not universally, accepted that multilateral free trade is always welfare improving, the welfare impacts of a discriminatory free trading area are ambiguous. The following review is confined to the welfare impacts of a free trade area (FTA). The FTA differs from the other form of discriminatory trade bloc, a customs union, in that FTA members are free to choose their external tariffs to third countries, whereas a customs union requires members to have common external tariffs.