Posted 16th July 2001

Mulroney Baloney

Brian Mulroney visted NZ recently promoting the idea of NZ joining NAFTA. To counter the untruths, Canadian journalist and free trade critic, Murray Dobbin requested a spot in the country's national newspaper, the NZ Herald, and they agreed to publish the following Op Ed. Should New Zealand embrace the North American Free Trade Agreement? If you listen to Brian Mulroney, the most unpopular Prime Minister in Canadian history, you would jump at the chance. But if you examine Canada's sobering experience, you might have second thoughts.

The main purpose of signing the agreement, according to Mr Mulroney, was to get a measure of protection from American trade remedy law. In return Canada agreed to give up, among other things, control of its energy resources. But then Mr Mulroney, forced by popular opposition to free trade, called an election. He was committed to it and the United States, shrewd and ruthless negotiators, knew it. They refused to give up their trade remedy laws. Canada signed anyway.

Just recently the US, for the third time, challenged Canada's lumber exports, slapping an 80 per cent duty on softwood timber. The US has lost two identical challenges, but it doesn't stop them. This is harassment, and it is not the only case. Canada has suffered a US cap on its wheat exports, repeated attacks on its dairy products, a ban on its potatoes and threats of heavy retaliation for its cultural policies. Before free trade, Canada had a made-in-Canada energy policy which included the authority to set a domestic price for natural gas while allowing the market to determine the export price. Free trade eliminated that authority and the competitive advantage it provided Canadian manufacturers. Now the enormous demand for gas in the US determines the Canadian price - which has skyrocketed in the past year.

Promoters of free trade point to the vast increase in trade with the US in the 1990s and declare that free trade was the reason. But there is scant evidence for that. A report last month by Industry Canada, a federal Government agency, revealed that only 9 per cent of the increased trade between Canada and the US resulted from the original free trade deal and NAFTA. The remaining 91 per cent came from the booming US economy and the weak Canadian dollar. While exports to the US have nearly doubled during the 1990s, so have imports. The promise of more and better jobs made by free trade supporters has not happened. A recent study, NAFTA at Seven, reveals that between 1989 and 1997, 870,700 export jobs were created, but during the same period 1,147,100 jobs were destroyed by imports - a net destruction of 276,000 jobs. Self-employment and part-time employment skyrocketed during this period, accounting for 43 per cent and 37 per cent of new job creation respectively. Average income a head fell for seven years and recovered to 1989 levels only in 1999, while incomes in the US increased 14 per cent. The free trade agreements were also supposed to vault Canada ahead in the so-called new economy. But in terms of performance, it has been the old economy which has done most of the heavy work.

Canada's overall trade surplus in goods in 1999 was $34 billion, but the carmaking industry accounted for $20.24 billion. Productivity in that sector increased 80 per cent between 1991 and 1998, compared with 9 per cent overall. Ironically, the carmaking industry was created by a managed trade agreement, not free trade. The Auto Pact, signed in the 1970s, guaranteed that for every Big Three cars sold in Canada, one was manufactured there. A World Trade Organisation ruling declared the Auto Pact in violation of WTO rules and it has been repealed. NAFTA was also supposed to attract a flood of new, productive investment and economic growth. In both these measures, the 1990s have been a huge disappointment. Economic growth and unemployment were the worst since the 1930s. The productivity gap with the US has widened. As for investment, in 1997 - a record year until then - Canada attracted $C21.2 billion in foreign investment. But fully 97.5 per cent of that went for acquisitions of Canadian assets.

But there is another area of public policy that New Zealanders should be extremely concerned about. That is chapter 11 of NAFTA, the investment chapter, and it highlights a fact about these deals largely hidden from the public: they are not mainly about trade at all, but about freeing American capital from the constraints of democratic governance. Chapter 11 allows foreign corporations to sue governments directly for measures that expropriate their property. But the definition of expropriation is extremely broad. Under NAFTA, the concept of regulatory taking prevails, meaning that any new government regulation that reduces a company's profits or its commercial value can be deemed expropriation. There have been at least 15 cases under chapter 11, five against Canada. The first was Ethyl Corporation's $US300 million suit against Canada for its ban on MMT, Ethyl's petrol additive, which Canada suspected of being a neurotoxin. Ethyl sued under NAFTA, and during the tribunal's hearings, Canada threw in the towel. It paid Ethyl $US13 million, publicly apologised for impugning MMT and repealed the ban. In part because of these NAFTA cases, support for free trade is dropping in Canada, though a majority still support it. A recent poll revealed who Canadians think have benefited from free trade: 41 per cent said business, 32 per cent said governments, 11 per cent said consumers and 2 per cent said workers.

There is only one certainty if New Zealand signs NAFTA: the US will get everything it wants because it refuses to sign deals if it doesn't. Canada's economy is one-tenth the size of that of the US, New Zealand's one-hundredth. The US doesn't need New Zealand so it will only allow it into NAFTA on its own punishing terms. New Zealand will thus be open to harassment from American trade remedy laws, and US corporations will have the powerful chapter 11 tool to challenge any law or regulation intended to strengthen the New Zealand economy or environment. With the New Zealand dollar at 40USc, any new American investment will likely be in the form of acquisitions and the domestic economy will suffer, as Canada's did, as New Zealand tries to compete with the American colossus.

An old adage applies: be careful what you wish for.

* Murray Dobbin, a Vancouver-based freelance writer, is on the board of the Canadian Centre of Policy Alternatives.

Also by Murray Dobbin about New Zealand Economic policies..

It has been so long since anyone in the business press has praised the New Zealand "miracle," it's almost as if we imagined the whole thing. But, of course, the current silence is really no mystery. The 15-year free market experiment has been an unmitigated disaster. The suffering caused among ordinary New Zealanders is well known: the highest youth suicide rate in the developed world; the proliferation of food banks; huge increases in violent and other crime; the bankruptcy of half the farms in the country; the economic disruption of hundreds of thousands of lives; health care, education and other social services devastated by the mad marketplace scientists.

But, of course, neo-liberal ideologues don't hold much truck with the human consequences of their experiments. So let's examine those things they do care about. The revolutionaries promised to tear down the "debt wall," unleash spectacular economic growth, spur foreign investment and productivity, create enormous new wealth and new and better jobs. They failed on every count. Instead of a brave new economy, they delivered an economic version of Frankenstein's monster. The initial wave of changes -- deregulation, privatization, tariff elimination -- was justified by the infamous debt crisis. This was a ruse all along. Even Sir Roger Douglas admitted this when I interviewed him in 1992. The "crisis" New Zealand faced post-election in 1984 was a currency crisis brought on by Mr. Douglas himself.

As for the debt in 1984, it was NZ$22-billion, but after 10 years of experimenting, it had doubled to NZ$45-billion -- in spite of the sell-off of NZ$16-billion in state enterprises. Today, it has finally returned to 1984 levels, but only through more Crown asset sales. And economic growth? In the years 1985-92, average economic growth in the OECD countries totalled 20%, while in New Zealand it was negative, at -1%. The promised creation of enormous new wealth went into reverse: Real GDP in 1992, at 5%, was below the 1985-86 level. A burst of growth from 1993 to 1995 petered out, and the economy steadily declined until it dipped into negative territory in 1998, posting the fourth-worst growth in the OECD.

The transformation of the economy was supposed to spur foreign investment, but it mostly meant a feeding frenzy on domestic corporate assets. In 1993, the proportion of GDP in investments was just 70% of what it was in 1984. The restructuring of the economy failed most dramatically on the unemployment front, and the country has never managed to get back to anywhere near the 1984 level of 4%. The "workless and wanting work" figure peaked at more than 18% in 1993. In 1999, that figure had been reduced only to 11.2%.

The radicals also promised increases in productivity, but again, they failed to deliver. After eight years of restructuring and massive labour deregulation, New Zealand's productivity began a steady decline in comparison with its neighbour, Australia. From 1978 to 1990, the rates had been similar. The gap steadily increased between 1990 and 1998, with Australia posting a 21.9% increase and New Zealand just 5.2%. Only the wealthy in New Zealand could see any benefit from this destructive exercise in social engineering. Between 1984 and 1996, the top 10% of income earners measurably increased their share of total income. The lowest 10% lost 21.6% of their 1984 income. More than 50% of the total working population had lower real income in 1996 than in 1984. There are lessons from New Zealand, but they do not involve adopting that tortured country as a model. The first lesson is that the unfettered application of ideology is inevitably destructive -- not just to democracy, social peace and equality but to the economy. Even as the revolution continued to deliver disastrous results, its promoters claimed it was because it had not gone far enough. The second lesson is that parliamentary democracy Anglo-Saxon style has proven extremely vulnerable to the ravages of ideology. A virtual executive dictatorship can implement policies that are never even debated during elections -- as happened in New Zealand in 1984.

The only thing that stopped the zealots from going even further was the introduction of proportional representation in the early 1990s and the subsequent election of minority governments. And that leads to the last lesson: Globalization is not inevitable, nor is it irreversible. The current New Zealand government (a coalition of a chastened Labour party and the left-wing Alliance) is unfortunately still committed to signing free trade and investment agreements. But it is reversing many of the most destructive policies. Included in this rethink are a reversal of the privatization of Accident Compensation Insurance; an immediate rise in pensions; a halt to the sale of public housing and a commitment to rebuilding the public housing stock; the appointment of a review committee on electricity pricing; the freezing of tariffs on clothing and footwear; and the re-recognition of unions.

The pity is that New Zealanders had to suffer through so much in the first place......

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