Trade is getting a bad rap but the concerns relate to other matters, other countries. New Zealand households benefit greatly from liberalised trade says John Ballingall, and the story needs champions

This is Part I of an ExportNZ paper commissioned from the NZIER.

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By John Ballingall*

Global sentiment has shifted against trade liberalisation and globalisation. There are concerns that increased imports are causing job losses and that economic integration initiatives like the Trans-Pacific Partnership (TPP) are restricting governments’ sovereign rights to legislate. Politicians are tapping into this rising tide of protectionism, most notably in the US and UK, but also closer to home in New Zealand. Against this backdrop, it is timely to remind ourselves why trade matters for Kiwi living standards.   

Trade liberalisation is getting a bad rap…

There exists in many countries an underlying alienation of a significant portion of the population concerning the exercise of power by what they see as economic and political elites that the voters cannot influence… Some sense of democratic renewal is needed to avoid alienation; there is a sickness in western democracies.¹

Concerns about globalisation and trade liberalisation are growing. The rise of Donald Trump, the UK Brexit vote and the rise of nationalist political parties in much of Europe all point towards a sea change in public attitudes around trade and economic integration.

And domestically, we have seen a breakdown in New Zealand’s long-cherished bipartisan support for trade deals, with Labour choosing to vote against the passing of legislation to enact the TPP. The extent of public opposition to TPP dwarfed that associated with the New Zealand-China Free Trade Agreement (FTA).

…and is bearing the brunt of a wider set of public concerns

One possible explanation: When Americans talk about “trade” today, we're not really talking about trade. Rather, “trade” has become a scapegoat for other economic forces and policy choices that have increased inequality, and a proxy for ethnic tensions and white anxiety about loss of social status.²

It is true that in some parts of the US and Europe there has been broad economic decline over the last decade; heightened exposure to international markets has certainly had an impact on some uncompetitive industries in some places (and often without the benefit of any significant social safety nets).³ 

However, technological change and ongoing ripples from the 2008 Global Financial Crisis have also had a large impact on the prosperity of these depressed regions. The former has led to greater automation, which boosts workers’ productivity – a good thing, albeit at the expense of more jobs in some sectors.⁴ The latter has dented households’ wealth and restricted the ability of many governments around the developed world to use fiscal policy to boost growth (e.g. via tax cuts).   

It is also salient to recall that the growth in trade since the 1950s has resulted in an unprecedented rise in global living standards, lifting hundreds of millions out of extreme poverty.⁵  However, a fair portion of the public’s current concerns about trade liberalisation is due to the perception that its benefits are not evenly shared.

While the empirical evidence on income inequality in New Zealand doesn’t bear these concerns out – at least not in recent decades⁶ – and cause and effect are often confused, these perceptions matter.

New Zealand is a ‘global player’ ⁷

They matter because New Zealand benefits from a liberal global trading environment. The goods that New Zealand is best at producing are often highly protected in our key export markets. Likewise, the potential expansion of our dynamic services economy – sectors such as ICT, transport, international education, financial services, or professional services such as engineering – can be curbed by heavy regulation in some markets.

Lower tariffs and non-tariff barriers, as well as reduced production and export subsidies in agriculture (and freeing up constraints on trade in services), will help Kiwi firms compete on a more level playing field. This in turn should lead to increased exports, firm expansion and more job opportunities.

New Zealand households also benefit from trade liberalisation that lifts imports. As discussed below, when we import goods and services that we are relatively less competitive in producing, this lifts the purchasing power of our income (i.e. how many goods and services we can buy) and allows a wider variety of products to be enjoyed.

A small and distant country like New Zealand also needs internationally-agreed trade rules in order to continue to enjoy the benefits of trade – without agreed rules in the shape of free trade agreements or multilateral treaties, if our key trading partners decided to put up the drawbridge, we would have little ability to insist that they keep their markets open.

New Zealand is not the US or EU

We need to be careful to avoid blindly ‘importing’ other economies’ concerns (e.g. the US ‘rust belt’ perceptions of the hollowing out of manufacturing due to Chinese imports). New Zealand has a much more flexible economy than those of rural US states and much of Europe:

• Our industries have been exposed to international competition for almost thirty years since the mid-1980s reform period, and the structure of the economy has adjusted accordingly. Our industries don’t hide behind tariffs or other trade barriers that just lead to inefficiencies and misallocated resources that make any eventual adjustment to trade liberalisation more painful.
• Our manufacturing sector in particular has already changed in size and scope in response to changes in global production patterns and technological change. It is no longer in decline, despite common misperceptions. Manufacturing has stabilised at around 10-11% of the New Zealand economy in recent years and its share of New Zealand’s exports has not materially changed for a decade.    
• Our labour market is able to respond quickly to changes in global economic conditions, as witnessed by our adjustment to the GFC, which was far less severe and much shorter than in many other places.
• Our fiscal policy settings place a priority on avoiding ongoing budget deficits and we are now paying down debt, which will help us cope with future economic shocks.
• Our monetary policy is independent and, while struggling to be effective in a world awash with unprecedented amounts of ‘cheap’ money, is generally regarded to have been effective in controlling inflation and contributing to economic stability.

And historically, there has been widespread support of globalisation and trade liberalisation in New Zealand – more so than in many other parts of the world. Yet the ‘social license’ granted to New Zealand’s politicians to pursue FTAs and multilateral treaties to open up access for New Zealand exporters and investors, while not yet revoked entirely, has been put on notice.                    

We need a new narrative on trade, because trade itself has changed

Trade creates many losers, and rapid immigration can disrupt communities. But the best way to address these problems is not to throw up barriers. It is to devise bold policies that preserve the benefits of openness while alleviating its side-effects.

Let goods and investment flow freely, but strengthen the social safety-net to offer support and new opportunities for those whose jobs are destroyed. To manage immigration flows better, invest in public infrastructure, ensure that immigrants work and allow for rules that limit surges of people (just as global trade rules allow countries to limit surges in imports). But don’t equate managing globalisation with abandoning it.^[]

To be durable, policy solutions need to be politically feasible, able to be practically implemented, and effective and efficient in achieving their goals.⁹

One of the challenges in determining whether policy solutions are “effective and efficient” reflects the nature of trade in the 21st Century. These days, “trade” goes beyond traditional models of bulk commodities being sold from one country to another, and into areas such as investment, intellectual property, services and even environment- or labour standards-related aspects.  Goods are increasingly made “in the world”, crossing borders and using multiple inputs of goods, services, technology, intellectual property and processes in many different markets. 

Modern trade agreements accordingly go beyond the old tariff-cutting models and into areas such as behind-the-border regulatory coherence, rules for cross-border investment, protection of the environment or intellectual property provisions.

Change is the only constant; we can’t wind back the clock

Our impression is that issues such as investor-state dispute settlement, or patent rules for medicines – decried by opponents of trade liberalisation over the past few years – have created a degree of doubt amongst many different groups of people in New Zealand as to why FTAs matter and who benefits (and doesn’t) from them, as well as broader questions about perceptions of “sovereignty”.  

As a result, it has become more difficult for these groups to determine whether trade liberalisation will be ‘effective and efficient’ in improving their living standards.

The response of politicians, policymakers and researchers to these concerns has not been sufficiently compelling. More needs to be done to remind stakeholders of the benefits of trade liberalisation – and the costs of the alternative.   

There must also be an acknowledgment that globalisation is a reality and the clock cannot (and should not) be turned back to pre-globalisation days, no matter how much some governments may think that this would satisfy domestic constituencies. 

A good starting point is to shift the focus of the public narrative away from “Trade liberalisation will boost exports” back towards a more household-centred story. Trade should only ever be considered as the means to a far more important end: lifting household living standards. Recent media releases by the Minister of Trade, including on the Trade Agenda 2030, are starting to emphasise this point, which is to be welcomed.   

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Notes:

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