John Ballingall says trade gives households more choice and makes budgets go further. It drives jobs and productivity, even if it does challenge uncompetitive industries

This is Part II of an ExportNZ paper commissioned from the NZIER. (Part I is here.)


By John Ballingall*

Trade gives households greater choice…

 

 

 

Exports are the only way that people living in a small economy can get access to a variety of products and services and having access to a wide and increasing variety of products is a mainstay of economic and social progress… To access a growing range and quality of products and services, something needs to be given in exchange. In a large country this exchange can take place within national borders. In a small country [like New Zealand], making this exchange means exporting. 1

Going back to basics for a moment, New Zealand cannot affordably produce all of the goods and services that its population demands. It’s unrealistic to expect a country of 4.5 million people to produce sufficient quantities of high quality agricultural products, low cost basic manufactured goods, premium hi-tech manufactured goods, non-traded services and export-focused services to meet households’ demands.  

We therefore focus on producing what we have a comparative advantage in. We generate export revenue from this specialisation, which we can then exchange for imports of goods and services from other countries (including imported intermediate inputs to help us produce more efficiently).     

As well as this specialisation allowing more efficient use of resources and hence higher household incomes, trade also facilitates greater choices. There is a large literature that discusses the gains to households from access to greater product variety due to trade.2

One seminal paper showed that the variety of US households’ imported goods increased three-fold from 1972 to 2001, which delivered benefits to US consumers valued at 2.6% of GDP.3 By way of illustration, if we applied this result to New Zealand’s GDP in 2001, the gains to New Zealand households from improved product choice from trade would come to $3.9 billion, or around $2,300 per household.4

The EC (2010) has estimated that the gains to the average EU consumer from enhanced trade are around €600 per year.5

…and makes households’ budgets go further

Exchanging our export revenue for imports is more beneficial for Kiwi households when the prices of those imports are falling, or at least rising slower than export prices. Lower import prices happen primarily through two channels: trade liberalisation (which reduces tariffs on the things we like to import) and technological change (which lowers the costs of production overseas).6

As Figure 1 shows, the prices of traded goods that all households buy, such as clothing, appliances and tools, have either fallen over the past decade, or only risen very slightly. In contrast, the prices for domestically-produced items in those groups have all risen by 40-50%.

The chart also shows the power of technological change on households’ purchasing power: the prices of imported telecommunications equipment and audio-visual and computer equipment have dropped massively over the past decade.7

Figure 1 Traded and non-traded goods prices
% change in CPI sub-index, 2006Q2 to 2016Q3

Source: NZIER, Statistics New Zealand

One US study estimates that trade contributes about 30% of an average US household’s purchasing power.8 In New Zealand this share would be far higher, given how trade-reliant we are compared to the US. And the contribution of trade to purchasing power increases for lower-income families, who tend to spend more on imported items as a fraction of their income than richer families. 

Another US study9 looked at the gains to US households of increased manufacturing imports from China between 1998 and 2008, and estimated it to be around US$250 per person per year.

A US think-tank has recently explored the potential negative impacts of tariffs on household budgets in the US.10  They estimate that if the US were to impose tariffs on Chinese imports, as was suggested during the recent presidential campaign, “the total added cost of Trump’s tariffs on your back-to-school shopping could cost nearly $300”.11

There is limited New Zealand data on this issue, but one study12 explored the gains to Kiwi households from New Zealand’s unilateral removal of import tariffs and other trade barriers in the mid-1980s reform period. It concluded that the reduction in tariffs generated around a 2% increase in Kiwi households’ purchasing power. This was mainly due to lower prices for footwear, cars, household appliances and clothing.

Trade drives productivity and creates job opportunities…

The number of jobs depending on international trade has never been so high. There is a serious threat for employment to be considered for countries introducing new protectionist measures.13

The central reason why countries trade is because they are comparatively more efficient at producing some goods and services than others. In New Zealand’s case, generally we are highly efficient at producing high quality food and beverages, and tourism, and less efficient at producing high-volume manufactured items due to our lack of scale. So we produce and export the former, and import the latter.

This specialisation lifts the economy’s overall efficiency (or productivity), which should then lead to higher living standards. As Figure 2 shows, the primary (trade-exposed) sector has shown far stronger productivity growth over the past 40 years than the largely non-traded services sector. Since it is productivity that drives up living standards, this provides an indication of the positive contribution of trade to Kiwis’ wellbeing.    

Figure 2 Labour productivity, by broad sector
Labour productivity, index 1978 = 1000

Source: NZIER, Statistics New Zealand

The tradable sector accounts for over $40 billion of GDP (20%) and over 350,000 jobs (17%) under a direct approach.14 When accounting for upstream industries – that is, including sectors that rely on these export- and import-intensive sectors – the tradable sector accounts for $85 billion (43%) of real GDP and some 725,000 jobs.15

Further trade liberalisation would support additional job growth. The OECD (2011), for example, looks at the potential impacts of a 50% cut in tariffs and non-tariff barriers by the G20 economies.16 Their modelling suggests that in the long run, this would boost New Zealand’s real gross domestic product by over 8%, lift unskilled employment by 2.6% and skilled employment by 2.0%. Based on today’s data, this would equate to an additional $18 billion of GDP (or almost $10,000 per household), 42,000 additional skilled jobs and 20,100 more unskilled jobs.17  

…but can put pressure on some industries

The culprit in that [pre-NAFTA] era was both international competition and the introduction of mini-mills, which allowed the production of steel with far fewer man-hours. Because of that and other technological innovations that improved productivity, total American steel output is about the same now as it was in 1990, even with far fewer workers.

That steep contraction in steel production jobs has been more than counterbalanced by a rise in other types of work. The 5,100 steel production jobs lost in Pittsburgh are dwarfed by the 66,000 health care jobs gained in the same span. Pittsburgh has often been viewed as the very model of a city moving beyond its heavy industrial history to find new prosperity in areas like health care, banking and professional services"18

Much of the recent backlash against trade liberalisation has been due to the perception that FTAs encourage imports from lower-cost producers, which can displace relatively higher-cost domestic production, causing job losses (including from shifting factories to lower-cost countries offshore), especially in manufacturing.

Two key points to note, however, are the following:

  • This is precisely what trade liberalisation is supposed to do. It encourages countries to specialise in what they are most efficient at producing. The idea is that the resources (labour, land, capital) that were previously employed in industries that hid behind tariffs or non-tariff barriers should be able to move into other more productive sectors that can compete more effectively in freer global markets.

    This is good for the economy overall, but does cause some transitional costs – workers can’t simply shift overnight from (say) steel production into high-tech medical equipment manufacturing. This is where government support for re-training is vital.
     
  • It is technological change, rather than trade liberalisation, that has caused the dislocation of the manufacturing sectors in most developed economies. Automation and capital-deepening mean that fewer workers are required per unit of output, and the consequence is lower prices for domestic consumers and firms. This is not something we can or should try to fight with trade barriers.

As the OECD notes, imports and unemployment are not correlated in the long term.19 This can be seen in the chart below – there is no positive relationship between import penetration and the unemployment rate in New Zealand.

Figure 3 Imports and unemployment in New Zealand
Imports as a share of GDP (LHS); unemployment rate (RHS)

Source: NZIER, 1850 website


Notes:

[1]        NZIER. 2013. ‘Lifting export performance: Actions to drive growth in exports’. Report to Export New Zealand.

[2]        Or ‘the extensive margin of imports’, in the jargon.

[3]        See Broda and Weinstein. 2006. ‘Globalization and the gains from variety’.  http://web.stanford.edu/~klenow/Broda_and_Weinstein.pdf

[4]        This back of the envelope calculation is purely illustrative. We would not expect the gains to New Zealand households to be the same as the gains to US households due to different trading patterns, different tariff levels and reductions, different preferences, etc. But as a rough indication of magnitude, and in lieu of any New Zealand-specific research on this issue that we are aware of, it is hopefully of some value.

[5]        EC. (2010). ‘Trade as a driver of prosperity’. Commission Staff Working Document.

[6]        Consumers also tend to benefit when the exchange rate appreciates, which allows the purchase of more foreign currency for each New Zealand dollar.

[7]        These CPI figures are quality-adjusted, so that they take into account the rapid improvement in computing power within your phone or TV, for example.

[8]        USTR. 2015. ‘The economic benefits of US trade’. May 2015.

[9]        R. Lawrence. 2015. ‘China’s rise and American welfare’. Chapter 5 in China’s economic transformation: Lessons, impact and the path forward.  

[11]      This of course assumes US consumers don’t switch to cheaper alternatives to Chinese imports, and that consumers bear the entire burden of the tariff; neither of which will be true. But the message is nonetheless helpful for reminding households that it is they who get hurt by tariffs, not just Chinese firms. 

[12]      NZIER. 1999. ‘Trade liberalisation in New Zealand: Effects on consumer welfare’. Report to MFAT, March 1999.

[13]      OECD. 2016. ‘Global Value Chains and Trade in Value-Added: An Initial Assessment of the Impact on Jobs and Productivity’. OECD Trade Policy paper 190. http://www.oecd-ilibrary.org/docserver/download/5jlvc7sb5s8w-en.pdf?expires=1481054893&id=id&accname=guest&checksum=97D61C7632CCBE23802FC49F21FAE9CC

[14]      That is, looking only at the sectors that export more than 10% of their production or are reliant (>20%) on imported intermediate inputs.

[15]      NZIER estimates, unpublished.

[16]      OECD. (2011). ‘The Impact of Trade Liberalisation on Jobs and Growth: Technical Note’, OECD Trade Policy Papers, No. 107, OECD Publishing. http://dx.doi.org/10.1787/5kgj4jfj1nq2-en

[17]      Based on estimates of the skill levels of New Zealand’s workforce at http://www.stats.govt.nz/browse_for_stats/income-and-work/employment_and_unemployment/skills-employed-people.aspx

[18]      New York Times. 2016. ‘Donald Trump’s Trade Nostalgia’. 28 June 2016. http://www.nytimes.com/2016/06/29/upshot/donald-trumps-economic-nostalgia.html?smid=tw-share&_r=2  

[19]      OECD. 2013. Ibid. 


This is Part II of an ExportNZ paper commissioned from the NZIER. Part I is here. The full Report is available here. This article is here with permission.

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10 Comments

Why is it cheaper to use automation in a different country? I would have thought automated industries would be cheaper to do locally as the production cost would be the same but transport costs would be lower. Toothpaste production for example. I imagine this would be very easy to automate yet when I go to the supermarket I cannot find one locally produced toothpaste product.

Scale. We could produce 4million tubes of toothpaste here, or tack our 4million tube needs to OZ's 20million output production line at a fraction of the cost. Then (and this is what hacks me off no end) automation seems to cost significantly more here than in other countries. Much of it I'd guess is lack of competition in our tiny market.

Next consider not so easy to make items rather than toothpaste. Lets say AR15 forged lower receivers. These are made en-mass in the USA (population about 400million and many Americans are gun crazy) yet there are only a handful of companies that do the forging in the country. Lots of people then do the final machining, result in the USA $60NZ a pop. Here, we import them and they are sold at $250NZ a pop. Competition from direct imports are then effectively stopped by regulations due to paperwork costs. ie to bring in a $60NZ receiver costs $375NZ in State department fees.

We could also then talk about cars, how many would we want? 100 a month?

Where we win is the 1 offs and small production runs that hold good margins which doesnt lend itself to automation but skilled labour.

Commissioning as well.

We don't exactly have a ton of robotics engineers, assemblers, and programmers lying around. Or the steel, carbon fibre, REE, and precious metals.

I imagine it would cost a fortune to effectively ship a "Factory" to NZ, then you would have to find a place to locate it, pay to assemble it, then pay ongoing power, maintenance, upgrade costs, etc...

Trade absolutely leads to specialisation, which has caused lower import prices, largely due to a lack of human basic rights in crap countries (which provides their comparative advantage).
However, let's go back to the main point of trade, as you talked about in the first article, being lifting our living standards. Our living standards will increase if we have cheaper goods and services, only if our incomes don't decrease at the same rate. So we need to see the whole picture to judge this; this article is incomplete.
My thoughts are that certainly we are better off, but there are other factors that have stopped us from being even better off.
So if real wages grow, and prices of goods and services in real terms drops, that equates to a lift in living standards. But where have real wages gone? What are the factors that have an effect on our real wages?
Investment in education is one factor, and also our immigration settings because that will determine whether we have a tight or loose labour market.

lower import prices, largely due to a lack of human basic rights in crap countries (which provides their comparative advantage).

That will be why we import so much from African countries and practically nothing from Australia, Japan or the US, then.

You forgot China, our largest trading partner. I hear they are human rights specialists.
It would be great to know from which countries we import those items that have gone down so much in price as per the graph.

Trade gives households greater choice…

But not the corresponding collective net disposable income to enjoy that choice beyond the claw of compound debt entrapment. View RBNZ data

But ... they're trying very hard to provide affordable choice at the Mega gigantic $2 shop Mitre 10

Not sure if its just me but the amount that I now purchase via E-Bay and overseas has sky rocketed lately with advent of the NZ Post "YouShop". The prices overseas on some small items are crazy low, especially when they also offer free shipping. Sure its no good if your in a real hurry but if you can wait a few weeks. Just cannot understand where the prices come from for some products in New Zealand, especially spare parts for just about anything.

I suspect it’s the NZ distributors – the ones with exclusive territory rights – who are price gouging the local consumers. The distributors live in palaces and drive to their flash yachts in flash European SUVs and sports cars, while the local retailers struggle to cover their rent. And any retailer who thinks adding GST to direct imports post election will save their bacon, they’re in for a big disappointment. If all those items were only 15% more expensive locally, a lot of us would buy local.