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Brief Counsel

Seven Steps to Heaven – or a step too far?

02 November 2009

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Prime Ministers Rudd and Key recently signed a Joint Statement of Intent on greater trans-Tasman economic integration. For the most part, it was unremarkable: a reaffirmation of both countries’ commitment to trans-Tasman market efficiency and regulatory co-ordination. Media attention accordingly focused on the more pressing questions of who would win the Bledisloe Cup and which PM would be wearing the other country’s tie come Monday.

But the statement may be more radical and far-reaching than most people realise, because ‘Principle 7’ states that the Single Economic Market (SEM) “should seek to optimise net trans-Tasman benefit”.

The focus on a “net” benefit seems to take the trans-Tasman relationship into new territory. This Brief Counsel explores Principle 7 and asks whether it needs more clarity and, perhaps, more thought.

Decoding Principle 7

What does “seek[ing] to optimise net trans-Tasman benefit” mean? Does it mean that we are now to follow an “Australasia Inc” policy, and on occasion sacrifice our immediate national interest to a (presumed) greater good? How will that work? Will we keep track of each country’s costs and benefits and make sure both countries obtain net benefit overall? If so, how? If not, why not?

The answers to these (and similar) questions could have profound consequences for New Zealand. But they are not to be found in the Joint Statement. Neither are they to be found in the papers released to us in response to an Official Information Act request – though those documents did reveal that:

  • a Cabinet paper (under the name of Commerce Minister Simon Power) describes Principle 7 as “a significant new element in explicit trans-Tasman messaging” which “would move beyond each side applying a narrower net national benefit test on an issue by issue basis to embracing a longer term more strategic calculation of overall balanced benefits across a broad number of areas of endeavours within the SEM”

  • the New Zealand Treasury, in a briefing supplied to Finance Minister Bill English, expresses “some caution around the trans-Tasman benefit test”. (An explanation from Treasury of its thinking was unfortunately withheld from the material we obtained on the grounds that publication may prejudice New Zealand’s international relations), and

  • despite the recognition of Principle 7’s significance, and the Treasury’s apparent reservations about it, there is no evidence of any detailed analysis being done – or even sought - on what Principle 7 might mean, and what its implications might be.

Principle 7 in practice?

The seven principles in the Joint Statement (see separate box) are designed to provide impetus and direction to the agreed set of “outcomes” which constitutes the SEM work programme. This encompasses financial and business reporting, insolvency, financial services, competition policy, corporate law, personal property securities law, intellectual property law and consumer policy. Specific proposals now include a single patent attorney framework, a single application process for patents and trademarks, a single personal property securities register, a single set of accounting standards, a single plant variety rights regime, common business competition rules and common consumer regulation.

How much further might it go? Prudential regulation of banks and quasi-banks? Employment law? Taxation? ACC? Environmental law?

If the potential scope of what is acknowledged to be “an aspirational single economic market agenda” is anything which might reduce regulatory cost for people doing business on both sides of the Tasman, then there is very little that is out of bounds. And, in a sense, neither should there be. Governments should always be prepared to consider improvements in their business and regulatory landscapes, and the content of work programmes is necessarily fluid.

Much more stable over time – and more influential - is the intellectual or principles-based framework which determines what proposals are pursued and what outcomes are sought or will be acceptable.

Conventionally, governments assess proposals on whether they are in the national interest – or, at least, part of a broader package which, while involving some give and take, is in the national interest overall. In short, they apply what the Commerce paper somewhat pejoratively refers to as a “narrower net national benefit test on an issue by issue basis”.

Application of a “net trans-Tasman benefit” assessment suggests a qualitatively different calculation – one which could permit some initiatives to be pursued even if the effect will be negative for one country, so long as the benefit to the other country is sufficient to outweigh this cost.

A leap of faith?

The Ministry of Economic Development (MED) says Principle 7 involves a “longer term more strategic calculation of overall balanced benefits across a broad number of areas of endeavours within the SEM”. But does it?

  • Trade-offs occur in business and politics all the time. But, for obvious reasons, people generally seek clarity around their trade-offs. A little ground is given here, a little ground is gained there, but both grounds are as well defined as circumstances permit. In contrast, the boundaries of Principle 7 are undefined. The ground being traded is not articulated.

  • Neither Principle 7, nor any other provision in the Joint Statement, talks of “overall balanced benefits” or suggests a mechanism to ensure this will be the outcome. While the New Zealand officials’ briefing paper may draw a line from “net trans-Tasman benefit” to “overall balanced benefits”, that line is not reflected in the words of the Joint Statement. And it is the Joint Statement that will be the reference point for future trans-Tasman policy.

The Joint Statement appears premised on the assumption that the SEM will deliver such significant benefits to both countries that there is no need for any additional mechanisms to ensure that costs and benefits are appropriately distributed. The Cabinet paper suggests something along these lines, saying of Principle 7: “It would also reinforce the underlying rationale for the SEM: that a strong trans-Tasman economy is in the long-term interests of both Australia and New Zealand, even where the immediate benefits may be less significant while still delivering a benefit to each country.”

But what analysis supports such a conclusion? Is there a risk that initial reforms will deliver disproportionate benefits to one country and that subsequent reforms which might redress the imbalance do not occur? If so, what will guard against this risk? And, perhaps most significantly, how will “net trans-Tasman benefit” be measured? Without a clear articulation of how this test will be applied, how confident can we be that “net trans-Tasman benefit” will deliver “net national benefit”?

According to the Cabinet paper, “[a]ll exercises in deep regional integration must at some stage confront this principle”. Assuming, for the moment, that “deep regional integration” is something which it is good to pursue, an equally important issue to confront is how to deal with a potentially uneven distribution of resulting costs and benefits. Should a party which would be adversely affected by some aspect of integration be entitled to “opt out” or be compensated by the party which does benefit? The Joint Statement does not even contemplate these possibilities - presumably from a conviction that they will not arise because the SEM will deliver sufficient benefit to both countries. But, in light of Principle 7, is that conviction justified?

Few would deny the benefits which closer economic relations with Australia have delivered New Zealand. But, likewise, few would argue that economic integration involves no potential costs and risks - whether it be the risk of adopting rules without the institutional framework and practices which make them work effectively, the risk of a “hollowing out” of New Zealand capacity if all the action is (or is perceived to be) taking place in Sydney, or the opportunity costs of foregoing potential “regulatory competition”.

The key question is how to weigh a proposal’s upsides against its downsides in order to decide whether to pursue it. It may not be easy to agree on how much something weighs – or even on whether it should be weighed at all – but under a “net national benefit” test at least we understand the scales. The question, after Principle 7, is whether the scales have changed - and whether we know how to read them.

Despite an explicit acknowledgement that Principle 7 takes the trans-Tasman relationship to a new level, evidence suggests that insufficient thought has been given to these issues.

For more information, please contact Chapman Tripp Partner Geof Shirtcliffe.

 

The seven principles

Principle 1: Persons in Australia or New Zealand should not have to engage in the same process or provide the same information twice

Principle 2: Measures should deliver substantively the same regulatory outcomes in both countries in the most efficient manner

Principle 3: Regulated occupations should be able to operate seamlessly between each country

Principle 4: Both governments should seek to achieve economies of scale and scope in regulatory design and implementation

Principle 5: Products and services supplied in one jurisdiction should be able to be supplied in the other

Principle 6: The two countries should seek to strengthen joint capability to influence international policy design, and

Principle 7: Outcomes should seek to optimise net trans-Tasman benefit.

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