Australia & New Zealand: Trading Solo and Getting Better Deals

May 13, 2016

Worried that the UK will struggle to trade outside the EU? Take a look at Australia and New Zealand. We negotiate our own trade deals with huge economies like China. The result: our trade grows faster than yours.

 

  • New Zealand negotiated its own 2008 deal with China. Exports doubled 

  • UK relies on EU for it's China trade. You have a £19 billion deficit

  • Australia’s deals with China, Japan & US generate an overall surplus

  • Relying on EU to negotiate UK trade gives you poor deals — especially in service

 

Australia and New Zealand prove that it’s possible for small, advanced economies to do well outside of big trade blocs. We don’t have the benefit of a vast trading area like EU’s Single Market, but per head, we export approximately the same value of goods and services per head as you do: US $15,175 per person here in Australia and $13,089 per person in New Zealand as compared to $16, 775[1] in UK.

 

By negotiating our own trade deals, however, we seem to get much better results than you do — especially in Asia-Pacific. We have our deficits – mostly in services – but our trade is still better balanced, with overall current account deficits of 4.6% of GDP in Australia[2], and 2.8% in New Zealand[3]. This compares to your deficit of 5.3%.

 

More importantly, our trade is trade is growing much faster than yours — an average of 5.8% in Australia and 3% in New Zealand, as compared to 1.8% in UK[4]. This has helped both Australia and New Zealand to surpass UK in living standards in the past ten years. In Australia, our GDP per head is now 50% higher[5]. So while your politicians tell you you’d be poorer on the outside, our experience shows you could do far better on your own. 

New Zealand: Population 4.5 million & a trade surplus with China

From an Australian perspective, your politicians are neurotic about UK’s ability to negotiate trade deals outside the EU. You are the fifth biggest economy in the world, and you have industrial and financial resources we can only dream of. Your export manufacturing – think Jaguar-Land Rover – is finally world-class again, and in the City of London you have the greatest concentration of financial expertise on the planet.

 

If you think UK couldn’t thrive in global trade on its own, just look at New Zealand. With 4.5 million people, New Zealand has a smaller population than Scotland. In April 2008, the plucky Kiwis took the initiative and signed their own free trade agreement (FTA) with mighty China. Take note, they were the first developed economy in the world to pursue an FTA in Beijing. They didn’t lack confidence.

 

The FTA was and is a very big deal for New Zealand. It proposed that all tariffs – or import taxes – on goods and services from China would be eliminated by 2016, and 96% of exports from New Zealand to China would be tariff-free by 2019. That’s courageous, in anyone’s national books. The Chinese economy is approximately 46 times bigger than New Zealand’s[6]. But the Kiwis did it anyway.

 

How has it worked out? Since 2010, when the agreement began to take effect, two-way trade between China and New Zealand has doubled, to NZ$21.7 billion today. In trade terms, that’s a huge achievement in just five years, but here’s the take-home-to-UK point. This ultra-rapid growth in trade has remained beautifully balanced: in fact the Kiwis have turned a modest NZ $861 million deficit in 2010 into an NZ $851 million surplus today.

 

So just to make that clear: New Zealand, population one-tenth the size of UK, negotiated its own trade deal with China that doubled exports in six years, and turned a deficit into a surplus.  

Dear UK: the EU isn’t shouting your corner

Compare this with UK’s trade performance with China. First, you don’t have an FTA with China because the EU hasn’t negotiated one — despite China being EU’s second biggest trade partner, and principal source of imports. And you can’t negotiate your own trade deal, because EU negotiates them for you.  Never mind though, you can rely on the sheer scale of the EU to negotiate the best trade deals that trade blocs can buy. Except is hasn’t worked out like that …

 

In 2014, UK had an overall trade deficit with China of £19.6 billion. To put that number in context, £19.6 billion is equivalent to almost your entire trade deficit with countries outside UK in 2015[7]. You imported £38.3 billion of goods and services from China, and returned only £18.7 billion of exports, which means you buy almost twice as much from them as they buy from you.

 

Sure you have a surplus on services, at £2.2 billion. But mirroring your EU trade, your services exports fall well short of your imports. Even with the EU to negotiate market access for you – the biggest trade bloc in the world – your services exports don’t come close to paying for the Chinese goods landing at Felixstow, Southampton and the Thames Gateway.

 

This failure to leverage your trade assets is even more peculiar than first appears. The Kiwis have a surplus of approximately £1.01 billion on their services trade with China. This is five times bigger per head than UK. What’s going on? Either the City of London isn’t even trying to penetrate the Chinese market, or EU is proving worse than useless at opening that market for you[8].

Australia: Making our own fortunes in global trade

Australia has it far easier than New Zealand: with a population of 23.3 million we’re a lot bigger, and we have huge natural resources that the Kiwis don’t. Even so, our economy is less than half the size of yours. Like New Zealand, we negotiate our own trade deals, and incidentally one of them is with New Zealand: an FTA called the Closer Economic Relations Trade Agreement. Like the EU, it provides open access to each other’s markets; unlike EU it doesn’t involve us making laws for each other.

 

On our own, Australia has negotiated free trade agreements with three of the world’s biggest economies: China, Japan and the United States. Admittedly, we lucked out in our China trade. The resources boom that ran from 2005–2014 sent prices of iron ore and coal rocketing. Last year, our exports to China hit A$90 billion, helping to create a goods and services surplus of A$44 billion (approximately £22 billion).

 

In all fairness, the UK could never replicate this export success because you don’t have the same assets. But look at the bigger picture. Our trade surpluses of A$44 billion with China and A$26 billion with Japan more than offset our A$24 billion deficit with US. Despite the fact that our economy is tiny compared to our three biggest trade partners, we’ve negotiated deals that keep our trade with them growing strongly and in overall balance.  

 

Contrast this with UK. You rely on the EU to negotiate and manage your trade, and yet your deficit with China is hopeless. And while your financial services are growing fast in non-EU markets, the EU isn’t negotiating the trade deals in Asia-Pacific that could transform you prospects. You could use your £19.6 billion trade deficit with China to negotiate vastly better access for your services: not just finance but consulting, accountancy and creative content. The EU isn’t helping you access these markets; and when you consider Asia’s rising middle class, the opportunity cost is vast.

Lessons from the Southern Hemisphere

As you try to figure out where Brexit could take you, there are three things that our experience tells you. And note, these are genuine experiences: proven in facts and data, not through theoretical economic models:

 

  • First, that two countries that closely resemble UK can negotiate trade deals with huge economies many times our size — and still come out on top.

  • That we aren’t exploited in trade negotiations just because our share of big countries’ trade is small. Once EU’s post-Brexit petulance subsides, it won’t matter that you’re just 16% of EU trade.

  • Most important of all, there are huge opportunities for negotiating trade deals in Asia-Pacific, especially if you have the skills and resources the size of the City of London.

 

Of course, Australia and New Zealand negotiate solo because we have no choice. You do. But from the looks of things, your EU membership gets you worse deals and worse results than we do negotiating by ourselves. You have to ask yourselves ‘why go on?’ If the trade history of Australia and New Zealand shows anything, you can definitely do better on your own.

 

 

© Phil Radford

 

 

References

 

 

Economy facts

Australia pop: 23.3 million, GDP per head: US $67, 460

New Zealand: pop 4.6 million, GDP per head US $41,820

UK pop: 63.1 million. GDP per head is US$ 41.780.   

(Economist, 2016. Statistics NZ gives higher figures for trade & GDP)

 

 

 

 

[1] The Economist: Pocket World in Figures, 2016 Edition.

 

[2] Trading Economics. Accessed here.

 

[3] Statistics New Zealand. Accessed here.

 

[4] Calculations of trade growth vary with each jurisdiction. This is from a comparable data set, 2011-2015 from World Bank.

 

[5] The Economist: Pocket World in Figures, 2016 Edition.

 

[6] 2014 data in US $s. Ibid.

 

[7] HMRC.

 

[8] The EU has all the negotiating leverage it could want since its biggest global trade deficit is with China.

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