Imposing trade barriers to support job growth is like shooting yourself in the foot
There is little economic logic behind the idea that higher trade barriers will support domestic employment and living standards in the long run.
Protectionism may well ‘save’ jobs in some sectors, but this comes at a cost. There are no free lunches. These workers can no longer be employed in more internationally competitive sectors. This suppresses an economy’s productivity and hence overall wage growth. And tariffs and other trade barriers push up the cost of living, which further exacerbates the negative impacts on households, especially poorer households.
By way of example, Donald Trump has threatened to impose huge tariffs on Chinese and Mexican imports on the basis that they are ‘unfairly’ displacing US domestic manufacturing production. One estimate is that such policies could result in the loss of up to 4.8 million US jobs.1
As we have previously noted, if isolationism from the global economy was the recipe for economic success, then North Korea would be the poster-child.2
Investment rather than protection is the key for helping these industries to adjust
The negative impacts on employment from deeper regional economic integration should not be dismissed out of hand. These costs are real, and can be painful for those displaced. New Zealand workers experienced such challenges in the post-reform period in the 1980s as previously protected sectors such as automobile production and assembly and apparel production – and even farmers – were exposed to greater international competition.
Governments need to do all they can to prepare workers for such changes through greater investment in foundation education and skills and vocational training.3 They should also provide short-term assistance when alternative employment is not readily available.
But these costs also need to be weighed up against the very real benefits that households and firms gain from globalisation and trade liberalisation.
Trade agreements now have impacts beyond goods exports and imports…
This changing [trade] landscape brings challenges. The beneficiaries of trade policies and the bearers of costs from barriers are becoming more diffuse than what they once were. There is a less vocal and identifiable constituency for reducing behind the border barriers or pursuing further economic integration than, say, reforming agricultural tariffs and subsidies.4
Another reason why trade liberalisation’s reputation has been dented in recent times is because of the changing nature of trade agreements. Modern trade agreements have extended well beyond the border (i.e. tariffs and quotas) and now commonly incorporate provisions that aim to regulate trans-national flows of people, intellectual property and investment, for example.
This has made many people wary about how they as individuals or households might be affected by FTAs. The recent TPP public debate rarely centred on market access provisions for our exporters or the extent to which New Zealand would have to lower its tariffs.5 Rather, the main concerns in New Zealand were about the ability of foreign firms to influence New Zealand’s regulatory settings such as the plain packaging of cigarettes, and the potential impacts of the intellectual property provisions on the costs of medicines.
…which means better evidence of the net benefits of trade liberalisation are required
The consensus that trade makes the world richer; the tolerance that lets millions move in search of opportunities; the ideal that people of different hues and faiths can get along—all are under threat. A world of national fortresses will be poorer and gloomier.6
While most of these concerns were overblown7, based on out of date negotiating positions or only marginally relevant precedent agreements, and fuelled by overseas social media commentators, they nevertheless highlighted a sea change in the way that the public engages with trade issues.
Members of the public want to know – and rightly so – what trade liberalisation and deeper economic integration will mean for their everyday lives. Many Kiwis won’t care about how many additional tonnes of quota access New Zealand gains from an FTA; they will care if the cost of their Netflix subscription rises or their prescription costs jump.
In our view, the further that regulatory changes from FTAs extend back towards households (e.g. IP, medicines, sentiment around sovereignty), the tighter the supporting analysis needs to be to demonstrate the benefits of these changes to households, not to firms. Researchers and policymakers need to step up the mark here.
This will be challenging because establishing the ‘right’ answer about the balance and distribution of costs and benefits is more difficult with behind-the-border regulatory changes. The net effects across stakeholder groups are more uncertain. But the work needs to be done, reviewed, refined and updated to ensure that officials and politicians have the necessary evidence to hand to explain the wider net economic benefits of further trade liberalisation.
There are plenty of areas of the ‘new’ trade policy that warrant further analysis
Some initial areas to explore with further quantitative analysis might include:
- What are the benefits to Kiwi producers of creative arts from longer copyright terms (as was envisaged by TPP)?
- How do these compare to the additional costs that might be imposed on libraries and other users of such goods and services?
- How might New Zealand’s services sectors benefit from reduced restrictions on their ability to trade in key markets? What impact would this have on employment and wages?
- What are the benefits to New Zealand investors offshore from an investor state dispute settlement that prevents their investments being unjustifiably expropriated?
- What additional gains could be made by improving New Zealand’s trade facilitation procedures?
- How could trade-distorting non-tariff barriers be addressed through trade negotiationss, and what might the benefits be for New Zealand firms and consumers?
- What could be the cost-savings or benefits for New Zealand firms (particularly in ICT) from new rules on the digital economy (for example, around data flows or protection of source code, as envisaged by TPP)?
The potential gains from these areas of trade liberalisation and economic integration are less well-known, partly due to the challenges of modelling them with confidence. But the evidence available demonstrates that the benefits to New Zealand to services and investment liberalisation, for example, are very large.
CIE (2010) explore the potential gains from a global agreement to remove the barriers to the cross-border supply of telecommunications, professional services and international air services, and eliminate barriers on foreign direct investment. This services liberalisation would increase New Zealand’s real GDP by up to 1.6% by 2020, equivalent to around $4.8 billion or over $1,000 per person.
On trade facilitation – which is about how easy it is for exporters and imports to move their products around the global economy – the WTO estimates that a comprehensive Trade Facilitation Agreement (TFA) would reduce trade costs by 14.5% globally and boost global GDP by between US$345 billion and US$555 billion per year.8 The OECD finds similar impacts of the TFA: a reduction in high income economies’ trade costs of 12-13%. New Zealand-specific results are not readily available, unfortunately.
The evidence base around the potential gains from reducing harmful, trade-distorting non-tariff barriers is limited, largely because determining the severity of such measures is empirically challenging. Recent NZIER work has estimated the potential cost to New Zealand exporters of APEC economies’ non-tariff measures9 at around $8.4 billion per year. NZIER also found the average ad valorem equivalent of APEC non-tariff measures is 9.7%, compared to an average tariff of 2.9%.
One New Zealand study10 compared the gains to New Zealand from global liberalisation of tariffs compared to the gains from removing all NTMs, and found that the latter would deliver over ten times as much as the former. A more recent study11 of the potential gains to New Zealand from TPP estimated that of the $4.2 billion of benefits to New Zealand, 70% could be attributed to a reduction in NTBs.
Kiwis rely on goods trade every day, in numerous ways; from the clothes we wear, the coffee machines and smart phones we rely on to function efficiently, the computers we sit in front of all day, the ethnic food we enjoy, to the wide-screen TVs we binge-watch Netflix on. Trade liberalisation has made these imports cheaper, which makes our wage packets go further, and has given us the export earnings to fund those wage packets in the first place.
Trade supports hundreds of thousands of jobs in New Zealand, providing households with income to spend on a wide variety of imported goods and services. Trade and trade liberalisation also helps New Zealand firms become more efficient, which supports productivity growth and higher wages.
Broader notions of trade, which include services trade, investment flows, and the movement of people and technology, also deliver daily benefits for Kiwis, even though they are harder to show in a tangible sense.
We take many of these benefits for granted – trade is as much part of the New Zealand way of life as watching the All Blacks win or enjoying a pavlova on Christmas Day. But we shouldn’t.
At a time when there are increasingly vocal concerns overseas – and to a lesser extent in New Zealand – about how trade and globalisation affect households, it is important to remind ourselves of how we all benefit from New Zealand being integrated with the global economy. When parts of the community raise concerns about the potential downsides of becoming further integrated, those concerns need to be calmly heard and responded to.
The costs of the alternatives need to be pointed out too. A deeper trading relationship with the world will make us better off; more protectionist alternatives would impose costs across the economy that would cause our living standards to deteriorate.
With a nod to Churchill, the inherent vice of globalisation is the unequal sharing of blessings; the inherent virtue of isolationism is the equal sharing of miseries.
 Peterson Institute for International Economics. 2016. ‘Assessing Trade Agendas in the US Presidential Campaign’. PIIE Briefing, September 2016. https://piie.com/system/files/documents/piieb16-6.pdf
 NZIER. 2016. ‘Trumponomics; Risks to the New Zealand economy’. NZIER Insight 64/2016. http://nzier.org.nz/static/media/filer_public/f7/f9/f7f9becf-8dbf-459f-a207-adf442e14599/nzier_insight_65-trumponomics.pdf
 The Labour Party’s ‘Future of Work’ programme touches usefully on many of these issues, albeit primarily with a focus on the dislocation that may occur through further automation in the workplace.
 NZIER 2013, ibid.
 This is partly because New Zealand has very few tariffs to lower, and those that are in place are little more than negotiating coin rather than genuine industry protection measures.
 See https://nzier.org.nz/static/media/filer_public/bc/21/bc21a5b2-3a6b-4ba2-8cf7-2f90fd5c6909/isds_and_sovereignty.pdf for a discussion on the controversial investor state dispute settlement provisions of FTAs.
 WTO. 2015. ‘World Trade Report 2015: Speeding up trade: benefits and challenges of implementing the WTO Trade Facilitation Agreement’. https://www.wto.org/english/res_e/publications_e/wtr15_e.htm
 Note that non-tariff measures include ‘legitimate’ measures as well as more protectionist barriers. See NZIER. 2016. ‘Quantifying the costs of non-tariff measures in the Asia-Pacific region: Initial estimates’. NZIER Public Good Working paper 2016/4, November 2016. http://nzier.org.nz/static/media/filer_public/51/5f/515f28b2-4c78-41f3-a908-5638613e10d8/wp2016-4_non-tariff_measures_in_apec.pdf
 Winchester, N. 2008.’ Is there a dirty little secret? Non-tariff barriers and the gains from trade’. University of Otago Economics Discussion Papers, No. 0801, January 2008. http://www.otago.ac.nz/economics/research/otago077106.pdf
 A Strutt, P. Minor and A. Rae. 2015. ‘A Dynamic Computable General Equilibrium (CGE) Analysis of the Trans-Pacific Partnership Agreement: Potential Impacts on the New Zealand Economy’. Report to MFAT, September 2015. Note that the benefits figures used in the government’s communications were somewhat lower than this – see https://tpp.mfat.govt.nz/assets/docs/TPP%20-%20CGE%20Analysis%20of%20Impact%20on%20New%20Zealand,%20explanatory%20cover%20note.pdf