The Trojan Horse

Jane Kelsey

6 September 2000.

The Trojan Horse: how a free trade and investment agreement between NZ and Singapore lays the ground for an Australia / NZ ? ASEAN free trade deal.

Why is the NZ government negotiating a free trade agreement with Singapore?

It's the new strategy to by-pass the international backlash against the global free market where:

• Poor countries say the deals made so far are unfair or not being delivered by rich countries and they are sidelined from any meaningful role in negotiations
• There is rampant self-interest and infighting among the rich countries who dominate these negotiations
• People are objecting to international agreements made by their governments without their agreement (or often their knowledge) and which limit what future governments can do
• People are mobilising all over the world against the effect of global free markets: growing inequality within and between countries; colonisation by transnational companies; exploitation of indigenous peoples and resources, of workers and the environment; and the subordination of culture, nature and society to the market.

As a result:

• Individual countries have gone cold on reducing their trade barriers without other countries matching them.
• APEC's "voluntary and non-binding" goal of free trade and investment regime by 2010 in rich countries and 2020 in poor ones is paralysed.
• Plans to move the APEC process on through the WTO have so far failed.
• Attempts at Seattle to get a new round of negotiations to extend the WTO failed last year.

So the new plan is to kick start the process by negotiating a lot of smaller agreements which can lock together to achieve their regional and global goals.

Why NZ and Singapore?

NZ remains gung-ho about global free markets; Singapore is selectively so. Both governments reckon if they can stitch up an agreement, and extend that gradually to others, they can eventually achieve the APEC goal of free trade and investment by 2010/2020. However, as negotiations proceed it's clear that Singapore has kept a lot more restrictions than NZ has.

When did they hatch this plan?

Around the time of the APEC meeting, when it became clear that APEC wasn't going anywhere.

That makes it sound like a conspiracy.

The officials prefer to call it a trade policy strategy. According to NZ's former chief trade negotiator, who now heads Asia 2000, in mid-March 2000: "Stated bluntly, the Singapore/NZ FTA is a Trojan Horse for the real negotiating end-game: a possible new trade bloc encompassing all of South East Asia and Australia and NZ". Because of the backlash against free trade and investment, they now call it a "Closer Economic Partnership" rather than a free trade agreement.

What other negotiations are currently underway?

There are a number of irons in the fire that we know about, and probably more that we don't:

• The NZ Prime Minister has announced that she wants to fast track negotiation of a similar agreement with Chile.
• A 'wise men's' group will report shortly on a free trade agreement linking the Australia and NZ free trade agreement (CER) and ASEAN. Australia is represented by retired trade minister Tim Fischer and NZ's by the previous government's finance minister Bill Birch.
• There is talk of a 'P-5' agreement between NZ, Australia, Chile, Singapore and the US.
• South Pacific Forum countries are about to sign a free trade agreement amongst themselves, which is expected to extend to Australia and NZ.
• There is a major push in NZ to integrate NZ further into Australia. A select committee has begun hearing submissions on the benefits of CER, and whether NZ should adopt Australiaís currency, an idea which several recent reports have promoted. NZ's finance minister has even suggested common citizenship.

Will these deals actually come off?

Some, like the 'P-5' are never likely to happen. Others will depend on how far the governments are prepared to go and how secretly they are able to negotiate them.

What stage has the NZ Singapore Agreement reached?

Negotiations are complete. Apparently the text goes to Cabinet for approval on 11 September.

What does the agreement aim to achieve?

The target is the APEC goal of a free trade and investment regime. So it covers trade in goods and services and deregulated foreign investment. While NZ has stuck to the 2010 target, Singapore claims "developing economy" status, with a 2020 deadline.

What are the specifics of the agreement?

That's impossible to say, because the text is still secret. The government did issue a summary cost/benefit analysis, but it was a propaganda exercise that told us nothing. That formed the basis of the so-called "consultations" with interested parties. More recently an update has been issued providing slightly more information, mainly to deflect growing criticisms.

What changes are proposed for trade in goods? There are very few tariffs on trade between Singapore and NZ, so the overall effect would be minimal. NZ's tariffs are mainly on textiles, clothing and footwear. These will be removed. That contradicts the new government's move to repeal the zero tariff law and keep TCF tariffs at 18% until 2005, as part of its employment, "closing the gaps" and regional economic development strategy. The government says only 1% of TCF imports come from Singapore so this won't have any real effect. But zero tariffs mean that level is bound to increase, and there has been no assessment of the impact on vulnerable factories and jobs of workers who are mainly Maori and Pacific Islands women.

What goods will be defined as "made in Singapore"?

The Rules of Origin require 40% of ex-factory cost to be local content. But it also 'recognises the economic circumstances of Singapore as a city state". That is ominous, as Singapore has factories in nearby free trade zones, such as Batam (formally in Indonesia) where it produces many goods, including TCF. At present, much of the production/assembly work in Batam goes back to be incorporated in products labelled "Made in Singapore". The Rules will require the last process of manufacture to be performed in Singapore, and it must not be minimal (such as packaging). However it could simply involve the pressing and labelling of garments made offshore. This allows Singapore to take advantage of low wages and infrastructure provided by the Batam Indo Development Authority, and export tariff free to NZ.

What labour conditions apply in Batam?

The workforce is highly feminised. There are no unions. The minimum wage is 425,000 Indonesian rupiah monthly - so even with overtime earnings most factory workers earn only US$52-65 a month. Their dormitories and factories are surrounded by barbed wire. Singapore, of course, has an equally appalling record on labour rights, including threatened and actual detention without trial under the Internal Security Act for those who organise and support exploited local and migrant workers.

Didnít the Labour/Alliance government push for labour standards at the WTO?

The 'Speech from the Throne' said legitimate issues of labour standards need to be integrated better with trade agreements', and the government's negotiators argued this in Seattle. Singapore refused to have any specific language on labour or environment standards in the agreement. The NZ government says they will 'progress' the issue through multilateral fora like the ILO. This shows how easily stated policy gives way to economic interests and ideology, and the naivety of people who argue that labour clauses in trade agreements, negotiated and enforced by governments, will deliver 'globalisation with a social face'.

How will these rules of origin be enforced?

The Exporters Institute has already pointed out that effective monitoring will be costly and is beyond the current capacity of New Zealand authorities - as the recent expose of the import of stolen second hand Japanese cars via Singapore shows. The latest information sheet uses discretionary words like New Zealand 'will be able to', monitoring 'may involve visits', tariff preference 'may' be denied - nothing mandatory.

If there are few restrictions on trade in goods, why have the agreement?

Trade in goods isn't the issue. The main targets are restrictions on services and investment.

What is the aim with services?

The APEC goal is 'free and open' cross-border supply of services by 2010 into NZ, although Singapore wants longer. Taken literally, this would mean removing all limits on access to each otherís markets and prohibiting any special treatment for local service providers for all services, including education, health, water, civil aviation, broadcasting. There are already some commitments along these lines under the WTO agreement on services (GATS), including on education and broadcasting. The non-binding Individual Action Plans tabled at APEC involve promises by each country to go further, but they don't cover everything. These are meant to be reviewed and extended, but the ultimate destination is impossible to tell.

What services are likely to be affected?

NZ has made new commitments in engineering, computer, transport, dental environmental and business services. But we suspect they've also changed the wording of some existing GATS commitments, especially in education. The officials insist no new regulatory settings will be required. What they are doing is locking in the regulatory framework developed under the free market regime to prevent this or any future government from tightening it. That will produce real contradictions with promises to roll back the free market. Free trade in education services hardly meets the promise to restore the 'nation building' role of tertiary education. The proposed exemption to allow measures that 'support creative arts of national value' is unlikely to apply to audio-visual services; these are already covered by GATS and CER, which officials say prevent the government implementing its policy of local content quotas for broadcasting.

Who counts as a Singapore service supplier?

There's been no suggestion of any effective 'rules of origin' for services. It would be quite possible for foreign services firms to set up a subsidiary or branch in Singapore to take advantage of the agreement (and vice versa).

Does the services agreement cover public subsidies for services?

It says the principles relating to competition 'provide some scope for disciplines in areas such as subsidies and regulation of services'. Without the text it's impossible to know what that might mean for the preference for public over private or what forms of domestic regulation are permissible if they are discriminatory or limit access for Singapore providers to the NZ services market.

Will the agreement put NZ and Singapore services on an equal footing?

No. Singapore has a lot more restrictions than NZ. In return for removing some of theirs, NZ will reduce further the few we have left. Singapore will still be much more restrictive than NZ.

What changes are proposed on foreign investment?

This is the major new area of commitments, certainly from the NZ end. The agreement will lock in the current almost unrestricted foreign direct investment regime. Late last year the National government said foreign investors only had to seek approval where their proposed investment was valued at $50 million or more, and even there no national interest test applies. Although the government says the criteria for investment wouldn't be subject to the agreement, any new requirements (such as a national interest test) could only apply to investments above that $50m threshold. The only exceptions relate to land, foreshores, islands and fisheries. Singapore will keep much tighter rules, especially to protect their 'Government Linked Corporations' which provide a huge investment base for Singapore.

What investments will this cover and what rights will investors be guaranteed?

Again, that's not clear. The definition is likely to be extensive. There will be guarantees that investment is not made more restrictive, and protections against expropriation. But itís unknown how far that will go, and whether that will affect the right to regulate or make policy decisions that adversely affect the value of a Singaporean investment.

How long would these rights exist for and how would they be enforced?

Again, they don't say. The Chile/NZ bilateral investment treaty signed last year (whose substance is much weaker than this is likely to be) binds both countries for 15 years, and if a country withdraws its guarantees apply to existing investors for another 15 years. That's even worse than the MAI! It's also not clear if investors would have the right to bring a dispute themselves and have the outcome enforced against the government. The government simply says the dispute settlement procedures will be 'robust' ie. hard to escape from.

What is the present balance of investment between NZ and Singapore?

Singapore direct investment in NZ (defined as a 25% stake in a company or asset) was $1163 million in March 1999. NZ's direct investment in Singapore was just $274 million. Hardly a level playing field . . . nor does NZ have the investment base for it to become one. Investment is also unstable. In 1996 Singapore's investment in NZ had been $3277 million! When things got tough after the Asian crisis they withdrew $1.1 billion in a single year.

What effect will these investment rules have?

The current situation will continue: the systematic stripping of the country as foreign investors bought existing businesses and resources, made a quick profit by laying off staff, closing down least profitable services, raising charges, taking most of that money out of the country instead of reinvesting in the business, and selling down their investments once they made the easy returns. NZ is left with a huge foreign debt and balance of payments problem. Meanwhile, foreign companies control most of NZ's financial, physical and communications infrastructure.

What other areas does the agreement affect?

The agreement will prevent either central government or local authorities from giving preference to local suppliers under government procurement, where the value is NZ$125,000 or more. This runs against a recent unanimous select committee endorsement of a Buy New Zealand strategy for government procurement.

What does this mean for Maori?

There is a clause that allows the NZ government to adopt any measures it deems necessary to give Maori more favourable treatment, including to meet its Treaty of Waitangi obligations. This is supposed to remove any Maori concerns. But the decision to take any such measures will rest in the government's hands. It also ignores the impact on Maori: removing the TCF tariffs will affect Maori workers; the $50 million threshold will prevent Treaty of Waitangi considerations being introduced into any national interest test for investments up to that level; the intellectual property rights agreement in the WTO will be reinforced; and Maori have no political say in the negotiation or enforcement process.

What does it mean for local government?

The latest government statement is misleading when it says no new obligations are placed on local or regional government. But they will still have to comply with these rules, and central government is required to take steps to ensure they do. It is not clear what constraints the services and investment rules will impose on them, what new policies they might prevent, or how they will effect regional economic development and employment strategies.

What happens next?

Signing such agreements is the prerogative of the Executive, meaning the Cabinet. Even if the Alliance votes against it in Cabinet, Labour will support it and will be signed. Under the new Treaty rules, bilateral treaties still don't need even to be referred to a select committee. But the government has come under pressure about the secrecy and undemocratic process. It has agreed that the treaty will go to a select committee for submissions, be reported to the House, debated and even go to a vote. But the vote is meaningless - Cabinet will still decide whether it should be ratified. This is a compromise that allows the Alliance to gain some political mileage from publicly opposing the agreement, while not putting the deal in jeopardy.

Where do the parties stand on the agreement?

The Greens are strongly opposed. The grassroots of the Alliance are also opposed, and it looks like they have forced the leadership to take a public stand. National is likely to support it, although they've been criticising the Treaty of Waitangi protections as too wide. ACT has taken the same argument further, and may vote against it. But with Labour and National combined, the government is likely to win the vote in parliament.

Is it possible to get out of the agreement in the future?

The agreement will be reviewed every two years with a view to expanding the commitments. A full review will take place under 5 years. But, based on CER, there is not likely to be any provision for rolling back any commitments, or for withdrawing from it altogether.

So future governments have no way out?

It's possible they could sign another bilateral treaty that supersedes this one, but both governments would have to agree. This means the agreement binds future governments in a similar way to entrenched legislation. That usually can't be passed without a 75% majority in parliament or in a referendum or both. Yet this can be done simply by the Cabinet.

What are the broader implications of the NZ/Singapore agreement?

The officials talk about it as a model agreement to be applied in other countries. Their main goal is to link CER and ASEAN. Based on free trade modelling, Australian and NZ governments claim that this would produce 'gains' of US$48 billion, with NZ$7.5 billion coming to NZ over 20 years. These projections are pure fantasy. And they systematically ignore the downsides. In challenging the Singapore agreement, the real question we need to ask is what would happen if NZ and Australian opened the door in the same way to goods and services produced in Indonesia, Thailand, Vietnam, etc, and vice versa?

What can we do about this?

A re-run of the MAI campaign:
letters to your MP
letters to the Minister of Trade, the PM and the Deputy PM
letters to the Secretary of MFAT
letters to the editor of local papers
letters to your local council
ring talkback
prepare submissions to the select committee

Written by Dr Jane Kelsey, September 2000

For more details contact GATT WATCHDOG, PO Box 1905, Otautahi (Christchurch) 8015, notoapec@clear.net.nz

For more information on the Singapore Free Trade Agreement, including recent updates on this article, see the index page on globalisation

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