While in Honolulu for the APEC summit recently, President Obama announced a 12-month timeframe to complete negotiations for the Trans-Pacific Partnership (TPP).

Some have welcomed this development, but, in truth, it is a disappointing one. It fails the TPP’s basic aim of creating a substantial agreement and a clear timetable for tackling outstanding issues in the negotiations — and it ignores the distractions likely to swamp the US in late 2012.

Attention will now turn to Bali and the East Asia Summit (EAS), widely regarded as focused on political and security issues and without an economic agenda — but that is mistaken. Asian economic integration has progressed a great deal due to the EAS process. For example, the EAS has been important in helping to facilitate debates over the relative importance of ASEAN+3, with its associated East Asia Free Trade Agreement, and ASEAN+6, with its Closer Economic Partnership for East Asia.

While financial and non-financial integration are yet to be combined in Asia, continued preoccupation with trade in the vein of 1950s tariff debates is a clear sign of outdated thinking. Economic integration will go beyond market access issues at the border to several aspects of regulatory cohesion whether it is pursued in Asian or Asia Pacific venues. Tariffs, for example, remain important to particular exporters, but most international businesses are more concerned with other barriers to their operations across national borders.

Asian processes are likely to have a greater focus on infrastructure development and a greater commitment to narrowing development gaps. The latter will likely result from the adaptation of supply chains to local circumstances and by encouraging innovation throughout these supply chains, rather than through continued flows of aid. Significantly, with political gridlock in the US and the rigidity of US ‘trade’ diplomacy, Asian countries should have plenty of room to coordinate and control their own Asia Pacific institutions and focus on such initiatives.

Still, many think the TPP has an advantage over the processes associated with the EAS, since the former has proceeded to a negotiating stage; and even some Asian officials affirm that American-led processes — negotiations — generate quicker and clearer conclusions than Asian processes. Some rebalancing away from Western-oriented negotiations to Asian consensus building should nevertheless be expected.

APEC’s founding purpose, for example, seems to have been a desire to link the West Pacific with the East Pacific by reconciling Asian processes of consensus building and Western notions of reciprocity through binding commitments and monitoring. Managing the tension between consensus and commitment has been an enduring theme throughout APEC’s history.

Today, several global trends are starting to push the emphasis toward consensus building.

First, wider participation in international economic processes and modern communications technology mean that international negotiations occur in national capitals, rather than plenipotentiaries meeting in seclusion (as in the early GATT rounds). The idea of ‘single undertakings’ was a device to promote compromise among likeminded negotiators and to socialise the concept of binding in the 1950s. Despite still having some merits, this approach is often a barrier to achieving widespread agreement among economies. Selecting members of a club is much more a matter of consensus than negotiating reciprocity.

Second, the width of the integration agenda contrasted with reciprocal agreements on tariffs is another point in this same direction. Several observers, most recently the Pacific Economic Cooperation Council in its statement to APEC this year, have concluded that the offer and acceptance modality of conventional negotiations is not appropriate for the barriers which are important in retarding services trade.

Third, events in the last year have raised questions over the West’s emphasis on concepts such as binding, agreements, monitoring and verification, and sanctions. While many observers are still sceptical of ‘voluntary cooperation’, consensual objectives and peer-review, recent events in Europe cast serious doubt over any unqualified preference for black-letter negotiated agreements.

Though a completed piece of paper, signed and dated, is an easy way to denote success, the term ‘negotiation’ should also signal each party’s commitment to reaching an agreement — and the relative commitment of participants in Asia Pacific and Asian processes is yet to be tested.

Some observers believe the US promotes ‘deep’ agreements with ‘massive political commitments’, while the only alternative is a ‘China-led model’ which is ‘relatively shallow and easier for governments to join’. They are likely to be wrong on several fronts. The current models are shallow and deep in different ways, but it is the Asian model which best accommodates supply chains and the importance of innovation. The sole notions of ‘US-led’ and ‘China-led’ are both superficial. Instead, the challenge for the US and its political institutions will now be to accommodate other TPP members. For Asia, its processes often draw on all members — and its challenge will be to regulate this approach.

Gary Hawke is a Senior Fellow at the New Zealand Institute of Economic Research and Professor Emeritus and former Head at the School of Government, Victoria University of Wellington, New Zealand.

1. U.S. trade policy in Asia: Going for the Trans-Pacific Partnership?
2. Obama in Asia
3. Institutional architecture in Asia: Challenges for the US and Russia

The prime ministers of Australia and New Zealand met earlier this month. Former prime minister Rudd never quite completed a visit to New Zealand. Julia Gillard was a substitute on one occasion and another was disrupted by the party coup which coincided with his last attempt.

The main tangible deliverable outcome from the summit was no more than an increase in the limit for Australian investment in New Zealand and New Zealand investment in Australia, without satisfying extra requirements for overseas investment. This is hardly a major achievement.

New Zealand and Australia have had a Closer Economic Relationship since 1983, of which the declared objective is to create a seamless single economic market. In some respects, such as the movement of labour, it is already an unusually advanced degree of economic integration. But there are always issues such as taxation provisions, entitlements to welfare payments and access for international air services on the bilateral agenda.

More important is the ambition to build the CER into a trans-Tasman approach to the Asia Pacific Region. Australia and New Zealand have many common interests. They also have differences; Australia is interested in the development of grain-fed dairying in China, while New Zealand seeks Chinese partners in the development of a market for grass-fed dairy products.  There are even more differences in the security field as Australia concerns itself with security from the North for a medium-term power while New Zealand is much more concerned about economic security. So a mere increase in bilateral investment limits could reasonably be described as trivial. Political timidity is the only reason for maintaining any limits on trans-Tasman investment beyond rules which apply to domestic investment.

Quite recently, there seemed to be prospects of faster movement on the agenda for trans-Tasman integration. Discussion proceeded about a spectrum of integration devices. At one extreme is unilateral adoption by one partner (usually New Zealand) of the rules and institutions of the other (usually Australia). At the other is a fully-fledged trans-Tasman institution with authority extending to both jurisdictions. Intermediate steps include authorisation for joint enquiry and action by national institutions such as those that exist between competition authorities. The trans-Tasman ambitions announced by ministers on a previous occasion included development in contexts such as competition approvals of a ‘trans-Tasman benefit test,’ that is, authority to approve transactions that had a net benefit in Australia and New Zealand as a whole, rather than net benefits in each of Australia and New Zealand separately. Nothing has been heard of this for some time.

Summitry is often about symbolism, and Julia Gillard has certainly attracted popular appreciation in New Zealand. She referred to the manner in which both New Zealand and Australia had recently experienced natural disasters, and while their preparations had been sufficient for them to be able to decline international aid, they both readily accepted trans-Tasman assistance. As Ms Gillard commented, ‘New Zealand alone is family.’ The sentiment is welcome, and it has weight, but I doubt whether it would be made to some Australian audiences where British ancestry is not common. Since the visit, New Zealand has experienced another devastating earthquake, and large scale assistance has been welcomed prominently from Australia and elsewhere, including from Asian partners.

Symbolism may be important for framing the environment in which Australian and New Zealand ministers and officials consider specific issues. New Zealand is able to participate in the Councils of Australian Governments, in which the Federal and State governments seek to coordinate their policies and activities. The tone of the Gillard-Key summit augured well for the continuation of what is a very unusual if not unique collaboration of national and sub-national governments.

So the absence of practical deliverables was not entirely negative. Ms Gillard won applause by conceding the right of New Zealand to export apples to Australia. New Zealanders appreciated the sporting images in her comments:

‘People might give a bit of advice to the umpire along the way, but we abide by the umpire’s decision,’ she said.

‘As a nation we would use those rules and appeal rights as they were made available. The umpire has now spoken we will abide by the decision. We believe in free trade and in its obligations.’

There will be a more general approval of the endorsement of the international trading system, and probably some puzzlement over why a few apples have such political significance in Australia.

Gary Hawke is a Senior Fellow at the New Zealand Institute of Economic Research, Professor Emeritus and former Head of the School of Government at the Victoria University of Wellington, New Zealand.

1. A new trans-Tasman defence relationship?
2. The Trans-Pacific Partnership
3. Obama’s regional summitry

At home, New Zealand marked time in 2010. Public commentary remained dominated by apprehension about the international economy. The Governor of the Reserve Bank published a memoir about the very reasonable worries over what could have happened but didn’t. The financial crisis in Europe and North America, which triggered a trade crisis in Asia, ultimately had only a moderate impact in New Zealand, which was also true for much of Asia. New Zealand’s insecurity is due to investment exceeding national saving and that is domestically driven.

After 24 years of sound government accounts, government expenditure has been allowed to exceed revenue and this is expected to continue for some time. This is partly attributable to the government’s response to the global financial crisis but more much to decay of the effective expenditure control, which was one of the least-heralded but most important of New Zealand’s economic reforms in the eighties. The comfortable familiarity of notions of ‘baseline’ funding and of reliance on ‘savings’ or reallocations within established departmental budgets has undergone revival. A new process for subjecting governmental expenditure programs to genuine scrutiny is now required; the lifespan of successful innovation in government management seldom exceeds 25 years.

New Zealand’s current government identifies itself clearly as a conservative-liberal administration, with a platform characterised by ‘nuanced change’. It has restricted the influence of advocates of both radical change and populism. Senior government members have, in their rhetoric, sometimes demanded proposals for ‘disruptive change’ from the public service, and dissatisfaction with public service cautiousness, which responds much more to government decisions than to ministerial rhetoric, has led to the government’s creation of task forces on tax policy, welfare policy, and national savings. While the government has presented this turning to ad hoc groups of advisers as being radically innovative, it is actually the continuation of longstanding tradition. The tax task force has already submitted its report. In response, the government accepted its least radical recommendations and implemented a modest tax switch from direct to indirect tax. The welfare and savings groups will report next year; but the Prime Minister has already ruled out making any significant change in entitlements to public subsidies in older age and no more than cautious evolution can be expected.

The Prime Minister’s Christmas message identified three priorities for 2011: the government’s ‘comprehensive economic growth plan’, the Rugby World Cup, and the general election which is to be held by the end of the year. One would hope that the first is not buried in the others, but the plan itself is not exactly breathtaking either. It consists of the familiar refrains of growth-enhancing tax reform; boosting infrastructure; better, smarter public services; business innovation and trade; boosting education and skills; and cutting red tape and regulation. Sound aspirations do not constitute a strategy. There is little hope that there will be a great deal of progress to report by the end of 2011.

New Zealand’s foreign policy shows similar caution and reluctance to contemplate major change. A Defence White Paper analysed New Zealand’s strategic outlook, with an unusually rigorous scrutiny of how the Defence Force uses its resources. Appropriately, New Zealand’s key strategic issue was defined as being the role it can play in the Asia Pacific region. The analysis is sober and realistic, yet still reveals nostalgia for the familiar. The White Paper lists the first purpose of the Defence Force as being for the defence of New Zealand. This is quickly related back to the protection of maritime resources, but is still clearly in service of a political purpose, seeking to reassure those who still think the traditional pre-eminence of defence as a state objective has any relevance to contemporary New Zealand. The White Paper also assures the Defence Force that its first purpose is to fight, although acknowledging that providing appropriate assistance in intrastate disputes and even peacekeeping and disaster relief are likely to be much more important military operations. Indeed, underlying the analysis can be detected a view that anything resembling significant warfare as conventionally understood is unlikely.

An unresolved foreign policy issue is that of regional deliberations. The government is trying to retain its traditional security relationships with Australia, US, UK and Canada and welcomes the distinct recent warming of relations with the US, while acknowledging that the weight of New Zealand’s economic relations has shifted towards Asia. It avoids facing the question of whether the ‘Asia Pacific’ construct which has been so congenial to New Zealand can really be the basis of international strategy for the next planning period.

The United States has a Pacific coastline, and much of its business looks towards Asia. The US market will remain significant. But that is a thin reed on which to hang confidence in the pre-eminence of an Asia-Pacific grouping.

In future, international norms and processes are likely to be guided by the G20 and relations between the G20 and such institutions as the WTO and IMF. Significant developments will require accommodation of Asia, Europe, the United States and other players. Asian economic integration is likely to proceed on the basis of addressing simultaneously both international supply chains dealing with all of production, innovation, and marketing, and also infrastructural development. Regulatory reform will merge with trade and investment liberalisation.

The US was invited to participate in the EAS on the explicit and even emphatic condition that it should participate in the existing agenda, not seek to convert the EAS to its agenda. While the US is significant in many Asian security issues, it is not a leader in the region’s economic agenda. The US remains a major participant in all international affairs, but it faces a major challenge in accommodating others as equals and it has yet to accept that ‘engagement’ is different from ‘leadership’, let alone ‘dominance’.

The New Zealand government and official machine continue to hope that comfortable structures from the past can be the basis for future strategies. Learning the reality is a task for 2011 and beyond.

Gary Hawke is Senior Fellow at the New Zealand Institute of Economic Research.

This is part of a special feature: 2010 in review and the year ahead.

1. New Zealand, Australia and China’s rise
2. India: a tough year ahead
3. New Zealand: foreign policy and the election

The decision by ASEAN to invite the US and Russia to participate in the East Asia Summit (EAS) from 2011 was widely interpreted by many commentators as a positive response to a US desire to join the EAS as part of its strategy to re-engage with Asia. But until recently, the nature of the US participation was not clear. The Hanoi meetings clarified some aspects of how the governments of the Asia Pacific will interact: the US and Russia are invited to join all activities, and the existing agenda of the EAS will remain unchanged. Reaching this decision was not simple. Implementing it will be even more difficult.

The first difficulty is revealed in the precise wording of various statements from Hanoi. They all express concern to maintain ‘ASEAN centrality’. ASEAN has been a remarkably successful region and institution, both politically and economically, but it is concerned about ensuring it maintains a voice in international affairs. Its regional affairs attract the interest of several major powers – all of China, India, Japan, Korea and the US, with Russia being significant in a few specific areas. The image of ‘ASEAN in the driver’s seat’ provokes thoughts of a driver whose employment will last precisely as long as three diverse passengers are content, but the more important point is that while East Asian economic integration would be greatly facilitated by readier agreement among China, Japan and Korea, that agreement also carries for ASEAN the possibility of marginalisation in regional affairs.

Additionally, the range of the current agenda of Asian economic integration is not widely appreciated, and it is certainly different from standard Washington views of trade liberalisation. It will be hard for US officials who are wedded to the templates of current US trade agreements to join in the intended progression, because progress has been slow in the four areas of tariff nomenclature, customs procedures, rules of origin and economic cooperation.

Furthermore, ASEAN and its partners have established pathways which link trade liberalisation and facilitation with regulatory reform, and economic integration to narrowing development gaps. This is most clearly illustrated in the Comprehensive Asian Development Plan and the ASEAN Connectivity Master Plan.

More broadly, the EAS is part of a regional alphabet soup with includes other existing and mutually-reinforcing processes such as the ASEAN+1, ASEAN+3, ASEAN Regional Forum (ARF), ASEAN Defense Ministers’ Meeting Plus (ADMM+), and Asia-Pacific Economic Cooperation (APEC). This range of overlapping institutions and processes is unlikely to diminish in the medium-term future. And while the US is indispensable in traditional security discussions in Asia, it is not indispensable to East Asian integration.

Of course, regional economic developments will proceed in a context of global interdependence, US markets will remain significant, and US officials and institutions will be important parts of the international financial system. However, Asian economic integration can proceed without US participation in many of its core processes.

The US and Russia must be careful. The economic agenda in Asia is about regional integration, not trade. ‘Community building’ is more than rhetoric. It signals an intention to take account of regional interests as decisions are made in individual economies. It is concerned with establishing regional rules and processes that give assurance that cross-border business generates regional economic welfare. While this is very likely to proceed at different paces across different dimensions – tariffs, customs procedures, monetary co-operation and so on – American and Russian leaders and officials have to adapt to this ASEAN led approach to trade and economic integration. If they fail to take heed of this warning, they may find that EAS is slipping away without them.

Gary Hawke is a Senior Fellow at the New Zealand Institute of Economic Research, Professor Emeritus and former Head of the School of Government at the Victoria University of Wellington, New Zealand

An earlier version of this piece was published here by the Asia New Zealand Foundation.

1. Russia in Asia and the Pacific
2. Realizing the Asia Pacific Community: geographic, institutional and leadership challenges
3. East Asia Summit: Where is Europe?

The G20 has been widely welcomed, but so far it has had little impact. If it should become effective, its legitimacy will become contested. Members of the G20 are more or less the 20 largest economies in the world. The criterion is arbitrary but not unreasonable. G20 membership is much more inclusive than that of the older G7 and G8. it is less dominated by north America and Europe than its predecessors. The inclusion of China, India and Brazil greatly enhances the legitimacy of its claim that it speaks for the major economies of the world.

The G20, however, has no basis in agreed treaties. It is not part of the United Nations system and it has no distinct legal basis. That is not unusual, as many international organizations rely on voluntary compliance. This imposes constraints on the ability of the G20 to create rules which can be applied to non-members—or for that matter, to dissenting members.

What then can the G20 legitimately do?

Firstly it provides an opportunity for leaders to share experiences as well as an opportunity to engage in bilateral meetings to pursue their own agendas. We should not underestimate the significance of confidence-building through personal relationships, nor should we expect too much from merely adding another occasion on which it can be practised.

The G20 provides leaders with an opportunity to submerge their domestic agendas in a wider common endeavour. One of the major contributions of APEC was that it encouraged unilateral reform. Participants were assured that criticism could be counteracted by evidence that on a wider international basis: similar actions had been
taken elsewhere.

This does not lead to positive evaluations when commentators try to distinguish between the effects of APEC separately from the effects of multilateral or unilateral action, but it is nevertheless a positive contribution. It is essentially the ‘Alcoholics Anonymous’ impact in which participants know perfectly well what they should do and that they themselves are best placed to do it, but benefit from the mutual support available through occasionally gathering with others facing the same problems. The G20 widens the group sharing this experience, and we can expect benefits for both those who were members of G7/G8 and those who were not.

The G20 provides an opportunity for participants to resolve disagreements. The record so far is limited—G20 statements repeat the familiar more than they demonstrate progressive resolution of issues. For example, there was no statement on improving the performance of rating agencies beyond the obvious that it would be desirable to do so. The G20 could barely close the gap between European reliance on more regulation and US wishes to allow tailored over-the-counter derivatives. These derivatives are to be traded among sophisticated investors while requiring standardised contracts and exchanges (which permit tracking of risk incidence) for other investors.

The G20 has done nothing to generate understanding of the extent to which the global financial crisis could be attributed to a ‘savings glut’ rather than policy errors in developed economies. Still, these are early days.

The principal impact from meetings of leaders is often that they set a timetable by when real work has to be completed. The APEC Economic Leaders’ meeting has long had this principal purpose, although it has escaped most media commentary. The East Asia Summit (EAS) has set timetables for both the work of the Economic Research Institute for ASEAN and East Asia (ERIA) and for working groups towards an East Asian free Trade Agreement and the closer Economic Partnership of East Asia. How this will work with greater US and Russian engagement in the EAS has yet to be seen. There is little equivalent to the G20 beyond ad hoc groupings, and one of the big issues for the G20 is how it will interact with regional organisations, international financial institutions, and regional development banks to develop such an agenda.

In these respects, the ‘legitimacy’ of the G20 rests essentially on consensus. The G20 is influential because of the size and significance of its members. Non-members will demand that they be allowed a voice on important deliberations and will challenge the ‘legitimacy’ of any claimed agreements on which they have not in some way been consulted.

A different kind of ‘legitimacy’ is involved if the G20 should claim an ability to impose requirements on simply anybody. Non-members will especially question any type of coercion. There is no link to the treaty basis which is the eventual basis for United Nations processes. Enforcement mechanisms may be indirect. Compliance with international banking norms and processes, for example, may rest mostly on access to certain banking resources. Also, compliance with international accounting standards may rest most on desire for access to US capital markets. Surveillance through customary international law is slow to evolve and slow to respond to particular issues.

We may well be sceptical for quite a while of the likelihood that the G20 will agree on anything which looks at all coercive. We can be content with seeing a wider body of world leaders contributing to the evolution of international processes and norms. The ‘legitimacy’ of the G20 in any attempt to go further will rest essentially on its ability to motivate and accept input and support through regional organisations in implementing any agreed processes.

Gary Hawke is Fellow at the New Zealand Institute of International Economic Research, Professor Emeritus and was formerly Head of the School of Government at the Victoria University of Wellington, New Zealand.

This is an article from the most recent edition of the East Asia Forum Quarterly: ‘Asia and the G20’.

1. The legitimacy of Japan’s Self Defense Forces
2. A Shanghai consensus?
3. The end of the Beijing political consensus?

For domestic consumption, the New Zealand government frequently trumpets the success of the China-New Zealand FTA in terms of short-run economic gain. So Foreign Minister McCully told the Foreign Policy School in Dunedin on 25 June 2010, ‘During the darkest economic days of the global downturn, but in the early stages of the implementation of New Zealand’s Free Trade Agreement with China, our exports to China for calendar 2009 increased by a massive 43 per cent.’

Prime Minister John Key told his National Party conference last weekend, ‘At the heart of our trade push are living standards and jobs.’

President Obama tells his domestic audiences that he intends to double US exports in 5 years at the same time as he tells Asian audiences that the US is back in Asia. Asians are unlikely to join in a crusade to double US exports or even to see it as part of the building of an Asian community within the global economy. The cognoscenti might realise that the president is talking about deeper engagement with the international economy, increasing imports as well as exports, but that is not what the domestic audience is intended to hear.

The New Zealand government can no more separate domestic and international audiences than can the US even if New Zealand is less likely to attract widespread international interest.

Increased exports to China have been welcome, but the FTA is far more strategic than commercial, and it is regional more than bilateral. The Chinese emphasis on continuing the ‘Four Firsts’ is a better prosaic statement than is the domestic political rhetoric.

New Zealand was first to complete an agreement on the terms of China’s accession to the WTO, first to recognise China as a market economy, the first developed economy to commence free trade negotiations with China, and the first developed economy to complete a free trade agreement. A ‘fifth first’ has been added with the signing of a free trade agreement with Hong Kong, following its conclusion of an economic partnership framework agreement with the Mainland. Such patterns seldom play a role in New Zealand thinking; its familiarity is testimony to accommodation of Chinese styles of thinking.

While the China-New Zealand FTA improves market access for both economies, and this includes bilateral exports in wine and dairy from New Zealand, the important elements of the agreement lie elsewhere.

The New Zealand fishing industry has plans to use increased opportunities to use processing facilities over a wider range of locations in China. China is using the New Zealand agreement and market to test its ability to comply with international standards in areas like product safety in electrical goods. The New Zealand market is not big enough to support the cost to China of implementing standards through central, provincial and local government agencies, but New Zealand is a useful learning-ground for wider international markets.

The agreement also includes clauses which provide for temporary movement of natural persons from China to New Zealand, again an exploration of something which must become more significant internationally. It also brings China within a world of binding investor-state international arbitration.

Most important of all, for New Zealand, the agreement strengthens New Zealand’s claim to participate in the process of East Asian integration. There will surely be a growth in China’s domestic market relative to Chinese exports to Europe and America. Asian economic integration will accompany that process. New Zealand policy is to facilitate integration and liberalisation by all available instruments, including the Trans Pacific Partnership and a Free Trade Area of the Asia Pacific. But there is more momentum in Asian economic integration than in Asia Pacific liberalisation—and the processes are complementary more than rivalrous. The China FTA is an indication of the genuine interest of New Zealand in East Asia.

There has been little concern about competition from Chinese products—they are too familiar and ingrained in the New Zealand psyche. There is concern over Chinese investment in New Zealand land. Conventional convictions about farmer control—which constrain capitalisation of Fonterra—is linked with nostalgia for a closed community. Participation in international supply chains cannot be restricted to only New Zealand ownership of assets overseas.

New Zealand is sometimes accused of being naïve about China. But naivety lies with those who identify Chinese ‘helpfulness’ or China’s participation in contributing to global public goods, with Chinese acceptance of US preferences.

From 2013, rugby sevens, a variant of rugby union, will be played between the provinces of China at China’s National Games. That creates prospects of major changes in world sports—but it is important for the symbolism that New Zealand can be part of the Asian community which is being built.

Gary Hawke is Senior Fellow at the New Zealand Institute of Economic Research, Professor Emeritus and was formerly Head of the School of Government at the Victoria University of Wellington, New Zealand.

1. New Zealand: foreign policy and the election
2. New Zealand: new beginnings in the region and new politics at home
3. India-New Zealand PTA: Broaden it for balanced gains

New Zealand marked time in 2009, with the government conserving its political capital but achieved little.

Much of the agenda was international rather than domestic. This was most obvious in the area of climate change. New Zealand shares the international policy issue of identifying a suitable response to a risk assessment and choice of appropriate insurance policy, but there was also much emotional nonsense. The decline of conventional religion has arguably created a vacuum for alternative end-of-the-world scenarios, and climate change has risen to prominence in the sequence of the self-destruction of capitalism, nuclear disaster, resource exhaustion, nuclear winter, and environmental disaster.

Even at a more trivial level, domestic politics was dominated for a while by a pale reflection of the British scandal over MP expense claims.

The government faced a demanding economic challenge, having inherited the consequences of fiscal indiscipline in the last years of the preceding government. Fortunately, New Zealand was sheltered from the effects of the global economic downturn due to its integration into Asian economic dynamism. Consequently, the government’s own inability to match strategic vision with operational decisions was not immediately damaging.

New Zealand’s government declared a commitment to closing the income gap with Australia by 2025. But its economic decisions, especially on infrastructural plans, were not consistent with such an objective. The report of the ‘2025 Taskforce’ chaired by Don Brash, former governor of the Reserve Bank and briefly predecessor of the Prime Minister, was essentially declared ‘dead on arrival’ and disregarded. The report’s emphasis on policy settings is indeed debatable, but it should have been seen as the first stage of a three-year research agenda rather than as an occasion for triumphal rejection of the supposed past. Sadly, the opportunism of most Opposition politicians was exceeded only by the folly and superficiality of the media. The current most likely outcome is abandonment of the strategic objective, unless reconsideration is forced by sober reflection on the consequences of this for New Zealand.

There was only a slightly less hostile reaction to the centerpiece of another report, by the Capital Markets Development Taskforce, which recommended partial floating of state-owned enterprises in the search for more sophisticated capital markets capable of supporting investment and innovation. ‘Privatization’ has become a slogan for those who are nostalgic for a mythical New Zealand believed to exist before the 1980s. More formally, the New Zealand electorate is presumed to have followed the dominant ethos of the local media, and become risk averse while claiming to want innovation. Holding on to what we already have seems to be more important than taking actions to enable us to have we want – whether in respect of thinking about how SOEs are structured, or how to turn Fonterra into an international corporation in the dairy industry rather than a mere producers’ cooperative milk processor.

A third major taskforce, concerned with improving New Zealand’s tax system, sensibly decided to delay its report to 2010. It floated several ideas during the year, and was discouraged from advocating anything which required too great an adjustment by an existing interest.

The underlying problem is that the government wants to make an impact on New Zealand’s social and economic development but is determined not to repeat the experience of a previous National government in 1993, when prompt action in its first term very nearly made it a one-term government and contributed to the electorate choosing to change the electoral system so as to constrain political change. We have a classic case of ‘time-inconsistency’ – the short-term measures to pursue an acceptable long-term goal are themselves unacceptable. Whether the government can use its continued electoral popularity to relieve its shackles in the election scheduled for 2011 is highly uncertain.

A bright spot for the New Zealand government over the last year has been in international economic policy and New Zealand’s participation in Asian affairs. The previous government was able to pursue the goal of an open internationally-oriented economy, collaborating vigorously with Asian economic dynamism, despite the presence among its supporters of strong protectionist pressures and wishes to subordinate economic goals to political correctness. The current government has had similar success, despite claims that it promised to protect everyone from everything. Thus, the Free Trade Agreement with China has been followed by increases in trade and closer economic integration notwithstanding the major difficulties of tainted milk products distributed by a subsidiary of Fonterra. Further agreements have been reached with ASEAN, and with the Gulf Co-operation Council, and patient diplomacy has had other success elsewhere.

New Zealand has participated fully in the economic integration initiatives of the East Asia Summit, and scored a diplomatic triumph in its early support for the Economic Research Institute of ASEAN and East Asia. While the Closer Economic Partnership of East Asia is not likely to be a conventional western free trade agreement even in the medium-term future, it will likely be a significant element in economic integration to which New Zealand has contributed and from which it will benefit. Additionally, the Trans-Pacific Economic Partnership Agreement may prove to be a major vehicle for keeping alive the idea of trans-Pacific economic co-operation, compatible with continued Asian economic cooperation and growth in a somewhat changed international environment.

The external success goes beyond the economic sphere to include New Zealand’s participation in the growth of a new form of community in East Asia. But there are challenges, not least in preserving trans-Tasman amity while pursuing somewhat different understandings of how Australia and New Zealand relate to Asia. New Zealand’s defence review, which is scheduled to be completed in early 2010, is an early test. There will be agreement about co-operation in the Pacific, and about the desirability of making relevant equipment and skills available for international peacekeeping (but not emphasising global citizenry in acquisition plans). The big issue is how the important middle ground is filled, with New Zealand likely to want its Defence Force to facilitate participation in East Asia’s management of its regional affairs.

There are issues of time-consistency in New Zealand’s international policies. But they are intellectual and policy issues. The government’s efforts have not been diverted by an impossible dream of achieving change without creating any dissent.

This is part of the special feature: 2009 in review and the year ahead.

Gary Hawke is Fellow at the New Zealand Institute of International Economic Research, Professor Emeritus and was formerly Head of the School of Government at the Victoria University of Wellington, New Zealand.

1. New Zealand: new beginnings in the region and new politics at home
2. Strategy more than commerce: China-New Zealand FTA
3. New Zealand: foreign policy and the election

The fourth bilateral meetings of prime ministers Rudd and Key in Canberra at the end of August can now be seen in some kind of perspective. Any pay-off lies in the future and has to be worked for.

Much of the immediate attention was focused on the defence area. The wording of the joint statement by the prime ministers is intriguingly opaque. The list of items to which ‘both governments would bring sustained focus to making new progress’ includes:

‘ongoing close defence relations to promote common regional security objectives, including, exploring possible opportunities to enhance our joint operational capabilities reinvigorating the ANZAC spirit.’

That has been translated by some commentators into a new ANZAC defence unit of some kind, which seems at best premature.

The agreement has salience because of the recent Australian Defence White Paper and the progress of the New Zealand Defence Review 09 towards publication of a White Paper in early 2010. The public consultation phase is well under way and so are both formal and informal discussions among officials and the relevant policy community.

Defence co-operation between Australia and New Zealand has opportunities and benefits. In particular, there is a high level of congruence of New Zealand and Australian interests in understanding developments in the Pacific and in preparing for possible reactions. The older tradition that Australia was concerned with Melanesia while New Zealand was concerned with Polynesia has disappeared as interdependence has grown in the Pacific as elsewhere and as Fiji has shown how the two areas are intimately linked. Academic specialists will reflect that both population pressures and reconciling tradition and custom with modern international notions of state-citizen relations are more difficult in Melanesia, and New Zealand cannot isolate itself from them.

There are differences between New Zealand and Australia even in the Pacific. New Zealand continues to give more importance to the Pacific Forum and to careful consideration of Pacific interests as defined in the island communities. It wishes to participate in small-state diplomacy rather than facilitate the leadership of a middle power. But there is a high level of convergence of interest which will assist trans-Tasman co-operation.

That is not true of the Asia Pacific region. Both countries agree that in the medium-term future to which defence reviews must relate, America’s dominance of the region will diminish. It will remain significant, but be in the region by invitation rather than by expectation. Regional affairs will be dominated more by Asians, especially by China. Australia sees considerable risks in this scenario, and its White Paper declares the government’s intention to structure its armed forces so as to be a significant medium power as the future unfolds. At the same time it continues to rely on the extended nuclear deterrence provided by the US.

While the New Zealand debate continues, it is likely to be more optimistic about the region. The New Zealand Defence Force will probably be structured to permit New Zealand to participate in Asia Pacific management of security affairs rather than to operate independently. New Zealand will neither want to share in Australian preparations to repel threats from the region, nor to stand aside from the region and exploit agreement with Australia in the Pacific while indirectly facilitating Australia’s strategy in the Asia Pacific region.

Reconciling ‘joint operational capabilities’ with ‘reinvigorating the ANZAC spirit’ could be challenging.

Tensions in the defence area are unlikely to be swamped by quick successes in economic relations. The improved travel arrangements across the Tasman announced by the prime ministers will be appreciated but are essentially minor and do not remove the underlying tension about the level of protection needed at a combined border. They do not even promise to be at the forefront of available technology. Extending exemption from review of higher levels of Australian investment in New Zealand is self-interest dressed as international agreement. Other elements of agreement, such as a joint food standards treaty and collaboration on scientific initiatives is simply revival of an existing agenda by discarding some political obstacles. ‘Cooperation between the Australian Productivity Commission and any future New Zealand Productivity Commission’ is surely payment not with a post-dated cheque but with an undated promissory note of indeterminate duration.

Nevertheless, there is real substance in the ‘Joint Statement of Intent: Single Economic Market Outcomes Framework’. First, it establishes a joint Trans-Tasman outcome implementation group of senior officials chaired by the Australian Treasury and the New Zealand Ministry of Economic Development. Secondly, among a list of familiar principles such as not requiring persons in Australia or New Zealand to engage in the same process or provide the same information twice, regulatory approval of goods and services operating in both jurisdictions, and regulated occupations being able to ‘operate seamlessly’ between the two countries, there is an apparently simple statement:

‘Outcomes should seek to optimise net Trans-Tasman benefit.’

Successfully persuading policy designers and regulators to use a trans-Tasman benefit test rather than a pair of national benefit tests has the potential to create a third generation of CER (closer economic relations) benefits.

Trans-Tasman relations are now led by an Australian prime minister who does not see himself as constrained by the past and by a New Zealand prime minister who is largely free from a small brother/larger brother need to assert autonomy. Whether long-term gains can be garnered depends greatly on managing short-term political disputes. The first may well be in defence and security affairs rather than development of the single market.

1. Trans-Tasman summitry
2. The Trans-Pacific Partnership
3. Trans-Pacific Partnership talks in Singapore: Now it gets difficult

New Zealand’s trade policy attracted unusual attention in the international press when Earth Times ran an article headed ‘New Zealand abandons regional free-trade goal.’ It gave prominence to trade union welcomes for protection of local industries and jobs, including one which identified ‘a final nail in the coffin’ for APEC’s Bogor goals. The article included a comment by Minister of Commerce, Simon Power, that most imports are duty free, and by Trade Minister, Tim Groser, that ‘New Zealand remained firmly committed to freeing up international commerce’ and advocated resistance to protectionist barriers. Nevertheless, the article implied a major change of policy had occurred.

The Earth Times article is clearly an overblown reaction to a minor step.

The error would have been apparent to anybody who checked the original government statement, ‘Trade agreements key to removing import tariffs’

Tariffs have been reduced to 5 per cent or 10 per cent where they have not been eliminated entirely, and whereas they had been fixed until June 2011, they are now to be maintained at those levels until 2015 unless they are reduced by Doha (which is unlikely) or by FTAs. There is no retreat from Bogor, nor any major change of policy.

Ministers responded to advice from officials engaged in negotiating free trade or closer economic partnership agreements that they would be handicapped if they had no ability to offer concessional tariff reductions. Because of the reductions already made in New Zealand tariffs, only trivial costs to consumer welfare would be incurred. That conclusion was supported by an NZIER study, but there was vigorous debate among economists about whether any cost was worth sustaining to provide negotiating coin.

The argument accepted by the government is a little surprising. Most informed observers think that trade negotiators want to reach agreement, even if only for a quiet life, and are constrained not by a need to achieve more than they concede but by what can be ‘sold’ to their domestic constituencies. Furthermore, tariffs are now less important than economic integration through investment and services agreements and agreements on the application of behind the border regulations. However, sometimes we have to play silly games because of the demands of other players – trade negotiations have been conducted on the basis of reciprocity for 75 years since the US Reciprocal Trade Act of 1934 despite the inconsistency of reciprocity with economic understanding of trade.

The Bogor Goals are not at issue. It is a pity that their formulation in 1993 was not followed by development of a practical expression for ‘free trade and investment’, and by a plan for the gap between the 2010 target for developed economies and 2020 for developing economies. The UK in the mid-nineteenth century was as close to a free trade economy as the world has seen and it retained some tariffs. The US legal requirement for reciprocity was always a problem for the US to adopt free trade 10 years before China. An APEC stocktake shows that the achievement since 1993 has been substantial but simplistic journalism will easily find evidence of failure.

The New Zealand government may have created some problems for itself in giving succour to protectionist elements in trade unions and business. Furthermore, the New Zealand move will be added to the list of inconsistencies between anti-protectionist declarations and specific actions, a list headed by US ‘buy American’ clauses and including most G20 economies. It will be impossible to counter that by simple logic. But the government is right that it has done no more that create some ‘playdough’ for the political game of negotiations, an act which is virtually harmless in terms of loss of consumer welfare for New Zealand or elsewhere.

Earth Times created a non-story.

1. New Zealand: foreign policy and the election
2. New Zealand: domestic disappointment and international success
3. New Zealand: new beginnings in the region and new politics at home

An Asia Pacific Community – though not in the sense intended by Kevin Rudd – is already being built. Its content can be traced in the work of the Economic Research Institute of ASEAN and East Asia, the Asia Development Bank, APEC and analogous institutions in the political-security field.

This community does not require stimulation, let alone direction, from a new Australian prime minister. The clearest message given to Rudd’s envoy, Dick Woolcott, as he tested reaction to Rudd’s speech was that the evolution of any Asia Pacific Community should be entrusted to existing institutions.

Many Australian politicians, officials and commentators like the idea of Australia having a seat in a select group entrusted with high policy decisions.

Peter Drysdale’s post refers to

‘the strategic role of the Asian five within the G20 process (the Asian G7 if you rightly include Australia and the Chair of ASEAN, who was invited to London meeting) as a pointer to the major players from our part of the world in that and other processes.’

The ‘Asian five’, presumably, are China, India, Indonesia, Japan, and Korea.

Australian enthusiasm would surely diminish if that group, along with the ASEAN chair and secretary-general, emerged as the executive committee of an Asian community.

Leaving Australian issues aside, the concept has structural flaws. Outdated ideas continue to rule us. The clockmakers of the early modern period permeated a lot of thinking about tidiness and the folly of duplication. How many hours have been wasted by APEC officials trying to eliminate duplication?

Public administration more generally is driven by simplistic ideas of tidiness and these same ideas have infected the disciplines of Political Science and International Relations.

Apart from these simplistic notions, nothing supports the idea that there should be one Asia Pacific Community, rather than a set of institutions supporting the various aspect of a deep community. It is surely time that our thinking was in terms of networks and their interrelationships, rather than in building an old-fashioned institution.

Asian integration, and the building of a community, has given a prime place to economic integration and an economic community. That was how living standards were most readily improved, and where Asian countries could most readily demonstrate their capacities to the rest of the world.

The ‘Asian miracle’ was above all an economic achievement (demonstrating a need to revise conventional international thinking). Creating an opportunity for China to participate in APEC along with Hong Kong and Chinese Taipei, depended on making APEC an organisation of economies.

Economics, however, is a style of thinking rather than a discrete aspect of life, and APEC networks, especially the Leaders’ Meeting, have always discussed what members wanted to discuss.

The notion that APEC is ‘economic’ in some narrow sense is a defensive mechanism by officials and commentators who, unlike Peter Drysdale, are unable to participate in discussion that utilises economic concepts and analysis. They would be just as handicapped in any network which focused on developing an Asian community.

There also needs to be an honest appraisal of the role of the United States. In security affairs, which tend to dominate the high politics of Asia Pacific, the US is a key player.

In economic affairs, the US is important but recent momentum has been towards Asian economic integration, with the US simply part of the global environment in which that is occurring.

Social integration and trends in the political field other than those closely related to security resemble economic integration more than they resemble security management. (There are lots of overlaps; human security differs from defence relations.)

From the US point of view, it is as unlikely that the US would want to be part of an Asian organization as that it would want to be part of the European Union. But just as it seeks leadership in NATO and in other North Atlantic organizations, so it would want a leadership role in the Asia Pacific. (And other Latin American countries would want to participate as well.)

It has been convenient for Asia to try to tie the US into an ‘Asia Pacific’ vision, but the US will insist on a global perspective. The vision of ‘open regionalism’ can be a contribution to world affairs, but Asia Pacific integration has to be compatible with Asian integration just as it will proceed alongside regional arrangements elsewhere.

This conception of an Asia Pacific community is simplistic. An effective network needs more than a wiring diagram. It requires people committed to maintaining relationships throughout the network and ensuring that agreed initiatives are implemented.

Finally, commitment to agreed objectives is what is important, for this idea and for others, not the size of political entities.

1. Special Editorial – What Prime Minister Rudd’s Asia Pacific Community Conference delivered
2. Rudd in Singapore on the Asia Pacific Community idea
3. Kevin Rudd’s multi-layered Asia Pacific Community initiative