Kiwis, emus fly together

New Zealand is famous for its exports. Not just in lamb and dairy but also design, the arts and music. Kiwi women do very well. Think of teenage singer-songwriter sensation Lorde and Eleanor Catton, the youngest person ever to win the Booker prize.

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Perhaps the quirkiest Kiwi export to hit the world stage in recent times is the TV version of 'Flight of the Conchords', a US show about two NZ buskers making their way in America.

"The competition between neighbours spurs each other on to outperform each other in many respects and collaborate in others."
Tim Harcourt, Fellow in Economics, UNSW Business School

In one particular episode, one half of the Conchords, Jemaine, has a fleeting relationship with an Aussie girl Keefa (which shocked him as he thought it sounded like a female version of 'Keith'). The next morning, Jemaine goes through the terrible shame of dating an Australian and asks Keefa many questions about her past (“Was your dad an Australian? Your mum? Your grandparents?") in the hope there's some NZ - or at least non-convict - genes in her ancestry.

The episode got me thinking about how NZers really view Australians and whether Australian-NZ alliances work well on the international stage (unlike Jemaine and Keefa's).

The rivalry extends to economic reform as well. The competition between neighbours spurs each other on to outperform each other in many respects and collaborate in others (particularly in third markets).

The economic reform story in Australia in many ways has NZ roots just in the same way that the social reform story of the 19th century in Australia (votes for women, conciliation and arbitration, democratic and property reform) also had Kiwi connections.

So why has Australia prospered? And why has NZ? Is it just rocks and crops? In the Australian case, yes, that's part of the story. You can probably explain the Australian-NZ economic divergence in terms of Australian mineral wealth that NZ lacks. But lots of nations have minerals but are not economically successful. This is because institutions also matter.

When we look at the multiplicity of trade agreements in today's global economy, the Australia New Zealand Closer Economic Relations (CER) deal is certainly the star of the show. It is considered to be “world's-best practice" when it comes to trade agreements and given the state of the NZ and Australian economy in 1983 it needed to be.

Back in the late 1970s and early 1980s, Australia was a text book underperforming economy. One with double-digit inflation and unemployment, an Olympic gold medal standard for industrial strikes, fixed exchange rate, few foreign tourists and protection all round. We performed dreadfully economically despite the mineral wealth we had. Socially we were flat out getting a decent Chinese meal anywhere.

But the only place worse economically than Australia in the OECD then was NZ. At the time, the Kiwis were regarded as the most regulated economy in the developed world, with inflation and interest rates at 16 per cent and a top marginal tax rate of 66 per cent to show for it.

NZ trade was also heavily regulated, tariff-ridden and subsidised. Exporting was considered a mug's game. The UK joining the European Union had stuffed New Zealand's lucrative export markets and it was turning inward as a result.

But that all changed on both sides of the Tasman in 1983 when we signed the CER, the successor to the New Zealand Australia Free Trade Agreement which had been considered to be more a 'non-aggression pact' (and believe me, we needed a non-aggression pact after Trevor Chappell's underarm ball in 1981).

The CER was the first deal of its kind and unleashed a new export culture on Kiwis and Aussies who had been used to protection as if it was a national pastime. The CER gave us a foothold in the outside world and allowed local businesses to venture beyond their own borders.

The CER has been an essential part of the transformation of the NZ and Australian economies and I see Australia and NZ's global transformation everywhere I go. If there's Beerenberg jam from Hahndorf in the hotel or on the plane, I bet there's New Zealand Anchor butter there too.

In fact, when I worked for Austrade as chief economist and travelled I was always offered a briefing from the NZ Trade Commissioner as well as my own colleagues in the Australian embassy.

The CER has brought benefits to Australia and NZ on both the macroeconomic and microeconomic level. There are bilateral benefits, at the macro level, as it allowed trans-Tasman trade to recover, which had actually been higher in the 19th century than in the 20th. Federation didn't help; trans-Tasman trade went backwards then, but domestic policy hurt both countries. On the investment front it allowed trans-Tasman investment to increase almost 60 fold.

At the micro level, perhaps more importantly, the CER gave Australian small and medium enterprises (SMEs) a kick start in heading over the ditch. There are now over 16,200 Australian exporters selling goods to New Zealand and many small companies got their big break in that export game.

In turn the CER enabled Kiwi SMEs to go global as it helped with market access, giving NZ businesses scale. It created for NZ businesses a single regional domestic market five times the size of NZ itself.

Not only did CER became a 'model agreement' for the rest of the world but it gave Australia and NZ a great platform for opening up to Asia, Latin America and globe. When you think of what market access Australian exporters had in 1983, 2003 and now in 2013, it's not a spaghetti bowl of trade agreements but a comprehensive set of regional and global agreements that the CER enabled us to be a part of.

So what's next for CER? In some ways we've grabbed the “low hanging fruit" in terms of tariff barriers and subsidies, so it gets a bit harder now as we try and harmonise intellectual property, industry standards, competition policy and even consider combining our productivity commissions.

There has often been talk of a common currency but we need to be careful not to go too far. You only need to glance at Europe and the problems a common currency has caused.

But there are things we can still do with CER for our mutual benefit, including as a model for other economies looking to open up. We can use it as a springboard into Asia and Latin America and other emerging markets.

The benefits of an 'ANZAC' business mission to third markets would be potentially more than a marginal increment in the bilateral relationship. We've seen many examples of these such as the PGG Wrightson Genomics & Australian Molecular Plant Breeding CRC, the New Zealand Bio Pacific Futures & Australia's Horizon Science and the NZ Government Solid energy – Australia's geosequestrian CRC.

Using the CER to create third-market trade and investment opportunities is important to both nations as when the terms of trade come off, if high exchange rates continue, we will need to boost productivity and our trading ties in Asia and Latin America can play a big role in this quest.

Institutional integration is useful and we respect national sovereignty under what the NZIER calls the 'collaboration-cooperation' model. This has occurred with the Productivity Commissions, in competition policy and in areas where Austrade and New Zealand Trade and Enterprise could potentially pool services in third markets.

We also co-locate our Geneva Missions to the WTO, NZ has membership of Australia's state ministerial council on international trade and there's potential for cross-board appointments and in our Industry Capability Network.

According to some prominent Kiwi business leaders, collaboration with Australia is just as beneficial as competition. Bill English, New Zealand's Deputy Prime Minister and Finance Minister, says there's a lot than NZ and Australia can do together.

“The New Zealand Economy partially relies on the Australian economy for its own success," he says. “In the GFC, the Australian stimulus package helped New Zealand as 25 per cent of our exports go to Australia."

“Our stimulus was started before the global financial crisis and was not just a response to the crisis like the Australian stimulus. Our stimulus was a mixture of tax cuts and infrastructure spending."

According to English, “New Zealand and Australia are still just corks in the ocean of the global economy. You may a big one and we're just a small one but we're still corks none the less".

“There's much we can learn from each other, and how much we can collaborate on."

So unlike the Jermaine and Keefa, Australian-New Zealand relationships really do work when it comes to trade and investment. In short, in a business sense, Emus and Kiwis both can fly. The economies are beginning to do so thanks to reform packages on both sides of the Tasman.

This story is an edited excerpt from The Airport Economist's new book, Trading Places – The Airport Economist's guide to International Business, published by NewSouth Books.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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