Sustainability and the New Zealand-EU Free Trade Agreement: A step up in accountability

When I speak to my clients in the New Zealand meat industry, I tend to keep two rather awkward things quiet. First, I’m a vegetarian. Second, despite the very modest market access outcomes for Kiwi beef exporters, I think the New Zealand–European Union Free Trade Agreement (NZ–EU FTA) is a good deal.

My view is influenced partly by the extent to which sustainability and climate policy priorities have been incorporated into the FTA. This article outlines the more innovative sustainability provisions of the NZ–EU FTA and offers some thoughts on their implications for the future of New Zealand’s (and others’) trade policy.

A Jewel in the Crown

The NZ–EU FTA, concluded in late June 2022, fills one of three major gaps in New Zealand’s extensive network of FTAs (the United States and India being the others). Many in New Zealand, myself included, were skeptical that an FTA would ever be concluded.

Economically, an FTA with New Zealand is never going to make anyone rich. Our population is similar to that of Ireland or Slovakia, our GDP is around 1.5% of the EU’s, and we have very few meaningful tariffs left. Economic modelling results needed more than two decimal places to register the EU’s GDP gains from the FTA by 2035.

From a political economy perspective, negotiating sensitivities abounded. For the EU, improving market access for New Zealand’s dairy and beef exports has always been the biggest roadblock to any FTA. Growing concerns over EU food sovereignty in light of the conflict in Ukraine added further spice.

The NZ–EU FTA, concluded in late June 2022, fills one of three major gaps in New Zealand’s extensive network of FTAs.

For New Zealand, the negotiating cupboard was bare. The EU’s ambitions for geographic indications posed major challenges. There was little appetite for copyright extensions. And politicians gave negotiators absolutely no mandate to move on patent term extensions.

Despite these challenges and constraints, a generally wide-ranging and forward-looking FTA was eventually agreed. The EU’s geostrategic considerations will have influenced decision-makers’ choices, but the ability of both parties to sell the FTA as being highly ambitious and progressive on environmental matters will also have contributed to a successful outcome.

Inverted Outrage: Kiwi exporters’ reactions were unusually mixed

Normally, when an FTA is announced in New Zealand, the outcomes are lauded by primary sector exporters and lambasted by environmentalists. Things were different with the NZ–EU FTA.

Meat and dairy exporters were extremely disappointed, albeit surely not surprised, that the EU would not offer commercially meaningful market access improvements for New Zealand’s key pastoral export products. Horticultural and seafood exporters were much happier. And there was general acceptance (or at least, no Trans-Pacific Partnership-style protests to the contrary) that the sustainability and climate provisions of the FTA were a step above what’s been done before.

Walking the Talk: Potential trade sanctions for failing to meet Paris Agreement goals

Much of the environmental interest relates to the Trade and Sustainable Development (TSD) Chapter of the NZ–EU FTA. Key provisions relate to labour standards, gender equality, climate change, emissions trading, environmental goods and services, forests, fisheries subsidies, and fossil fuel subsidy reform.

This chapter represents the first time the EU has made commitments in an FTA to refrain from granting or maintaining harmful fisheries subsidies. It also contains the EU’s first FTA article on fossil fuel subsidy reform.

The novelty is that the entire TSD chapter is subject to the agreement’s dispute settlement provisions and thus legally binding.

In aggregate, the content of the TSD chapter is not especially novel—similar provisions can be found in many of New Zealand and the EU’s previous FTAs. Both parties are strong promoters of progressive and sustainable development initiatives.

The novelty is that the entire TSD chapter is subject to the agreement’s dispute settlement provisions and thus legally binding.

Most notably, the parties’ commitments to “refrain from any action or omission which materially defeats the object and purpose of the Paris Agreement” are subject to dispute settlement and potentially trade sanctions if breached. The potential for trade sanctions to apply to breaches related to the object and scope of the Paris Agreement is a first for both countries.

This is the first FTA for both parties in which gender commitments are enforceable.

The other provisions of the chapter (e.g., trade and gender inequality, fishing subsidies) can be taken to dispute settlement for a ruling but are not “sanctionable.” This is still relatively novel and ambitious for an FTA. For example, this is the first FTA for both parties in which gender commitments are enforceable.

In totality, the TSD chapter of the NZ–EU FTA represents a significant step up in the degree to which FTA partners can hold each other to account on key sustainability issues.

The Proof of the Low-Carbon Footprint Pudding Will Be in Its Eating

What this means in practice is not yet clear, but conceivably—and as a last resort—it could lead to the suspension of obligations in other parts of the agreement (say, tariff reductions) if a dispute settlement panel finds that a party has introduced policy or regulatory measures that “materially” work against the Paris Agreement’s objectives.

These objectives are very broad, relating to holding global temperature increases to “well below 2ºC above pre-industrial levels,” increasing adaptation efforts without threatening food production, and providing climate finance to support a “pathway to low greenhouse gas emissions and climate-resilient development.”

Exactly how a panel could deliver an objective assessment on whether a party’s introduced action or omission contradicts these broad objectives is uncertain. Doing so would no doubt provide endless excitement (and billable hours) for trade and environmental lawyers.

The NZ–EU FTA has set a bold precedent for the sustainability aspects of future FTA negotiations.

But as a signal to other countries that New Zealand and the EU are ambitious in areas of overlap between trade and climate policy, these provisions send a powerful message: We are prepared to move beyond dialogue, cooperation, and best endeavours and commit to facing potential trade sanctions if we don’t fulfill key environmental (and labour) obligations.

The NZ–EU FTA has therefore set a bold precedent for the sustainability aspects of future FTA negotiations. It will be interesting to see how other countries with whom either party seeks to negotiate perceive this precedent. Will developing countries expect common but differentiated responsibility to apply to the sustainability provisions of future FTAs with New Zealand or the EU, for example? And how might the United States respond, given its political challenges around climate policy?

Future-Focused Dialogue

Another novel aspect of the NZ–EU FTA is its cooperation chapter on sustainable food systems. Under this chapter, the parties have agreed to “establish close cooperation to jointly engage in the transition towards sustainable food systems.” Such systems “ensure access to safe, nutritious, and sufficient food all year round in such a way that the economic, social, cultural, and environmental bases to generate food security and nutrition for future generations are not compromised” (Article X.3.2).

Cooperation topics mentioned include organic and regenerative farming, reducing the use of fertilizers and chemicals, ensuring resilient food supply chains during crises, the impacts of food production on biodiversity, consumers’ carbon footprints, and Indigenous knowledge in food systems.

As a cooperation-only chapter, we might not expect any particularly material outcomes from the parties’ discussions. But the signal is again clear: There is explicit room in FTAs for provisions that encourage dialogue on important intergenerational sustainability issues, even when they relate to areas subject to strong offensive or defensive political economy pressures (i.e., agriculture).

Ever Decreasing Circles

It would be fair to say achieving meaningful action on climate change is a much greater priority for most people than seeking economic efficiency gains from trade liberalization. So if trade policy writ large is to retain a social licence to operate and bring all constituents along, it needs to take society’s sustainability and climate concerns more actively into account.

Both the EU and New Zealand are trying to do just this through their Together for Green and Just Economic Growth and Trade for All initiatives, respectively.

The NZ–EU FTA represents a positive evolution in how trade policy and sustainability issues are treated in FTAs. No longer are sustainability concepts given lip service and then relegated to standalone “trade and…” chapters that look good on paper but have no material implications in practice.

Rather, they are infused across many chapters of the FTA. And failure to adhere to key environmental commitments in the FTA could have meaningful economic impacts should trade sanctions be invoked.

In my view, this highlights the increasingly overlapping domains of trade and climate policy. A Venn diagram of the intersection of these policies is gradually moving toward being a single circle.

Trade Negotiators = Climate Negotiators?

We are headed into a world of linked emissions trading schemes and global carbon pricing, Carbon Border Adjustment Mechanisms, low-emissions “green corridors” for aviation and maritime transport, and expanding markets for sustainably produced goods and services (to name but a few). All of these relate to both trade policy and sustainability/climate policy.

This means more trade negotiators will need to deepen their understanding of sustainability and climate policy. They will need to give sustainability outcomes greater weight in developing their negotiating positions and be more aware of the climate and development implications of their trade policy approaches.

More trade negotiators will need to deepen their understanding of sustainability and climate policy.

And climate change policy-makers and negotiators will need to be more attuned to the important role that trade can play in addressing global emissions reduction and the important trade implications of setting ambitious domestic and international emissions targets.

Finally, these overlaps imply that commentators, researchers, firms, and policy-makers may need to rethink how FTAs are to be evaluated. Trade and climate outcomes increasingly need to be seen in the round. As noted above, the NZ–EU FTA is not particularly ambitious on market access, for example, but is groundbreaking in some of its sustainability aspects. Getting this balance right is likely to become a key challenge for FTAs in the future.

A Job Well Done

Whether or not the NZ–EU FTA will deliver more societal welfare benefits than an FTA that is more aggressive on market access but less progressive on sustainability remains to be seen. But for now, it seems fair to say—with sincerest apologies to my meat industry friends—that both sets of negotiators did a good job delivering a long overdue and highly challenging FTA.

John Ballingall is a Partner at Sense Partners, a New Zealand-based economic consultancy. He specializes in the economic modelling of trade and climate policy.