Spot the good guys

Trade wars are top of mind for those interested in the macroeconomic outlook. As our own Reserve Bank said in today's monetary policy review, " A drawn out period of [trade] tension could continue to suppress global business confidence and reduce growth". And it's not just the US vs China stuff, bad as that is, but it's all over the place, as the World Trade Organisation pointed out a few days ago under the heading 'WTO report shows trade restrictions among G20 continuing at historic high levels'.

Out of casual interest I had a fossick through the WTO's trade database, which among other things counts the prevalence of trade barriers. Here's an interesting result.

We're not angels all the time, but at least on this criterion New Zealand scrubs up well by not adding much to the current protectionist rackets. And full marks to MBIE and the National-led government who in 2017 drew the teeth of the worst of these anti-dumping rorts, by amending the law so that consumers got a look in before anti-dumping duties get imposed. 

Here's the press release at the time, and if you're a trade policy tragic the new public interest test can be found in s10F(2) of the amended Trade (Anti-dumping and Countervailing Duties) Act 1988. It reads: "Imposing the [anti-dumping] duty is in the public interest unless the cost to downstream industries and consumers of imposing the duty is likely to materially outweigh the benefit to the domestic industry of imposing the duty".

Personally I'd have put the onus the other way around - "Imposing the duty is not in the public interest if the costs to downstream industries and consumers are likely to materially outweigh the benefits to domestic industry" - but hey, in these more trade-hostile days, I wouldn't quibble too much about wording. When you get a pro-consumer public interest test in trade law, take it and run.

No cheap cars please, we're Aussies

What a bestiary Aussie politics is these days - and I don't mean the dogfights over second citizenships, though it would be nice if some of the oddballs who got in at the last election have at least one Irish grandparent, making them Irish citizens by descent and ineligible to keep their seats.

Away from the citizenship headlines, some of the pollies have been up to an unpleasantly protectionist bit of business which has seen the Aussie government rat on its previous commitment to consumers to allow some second hand car imports into Australia.

Infrastructure Minister Paul Fletcher's media release, 'New Road Vehicle Standards Act to Better Protect Consumers and Provide More Choice' (!) was dolled up in the dress of consumer welfare ("appropriate consumer awareness and protection arrangements") but none of the arguments he made looked convincing. The world Fletcher painted - of high administrative costs and no big net benefit to consumers - bears no relationship to the reality we've experienced in New Zealand. A reference to "price reductions estimated to be less than 2 per cent across the market" in particular looks a very lowball number, and I suspect the "across the market" reference, decoded, means "not a lot of change for some, but quite large reductions for others". As well as not conforming to the facts as we have actually lived through them, maintaining the ban flew in the face of advice from a variety of Australian bodies including the Harper review of competition policy.

Perhaps, despite their flimsiness, the Aussie government believes its justifications, but that may not all that is going through its mind. For the Aussie Financial Review, "It is understood that heavy lobbying by politically influential car sellers - as well as backbenchers such as John Williamson, Warren Entsch, Andrew Broad and Ian Macdonald - prompted the government to dump the option" (in  'Car buyers lose out as government backflips on parallel import rules', which may be paywalled, but if you haven't got a sub, get one).  Whatever the government's possible mix of intentions, an end effect was to do a big favour for a small, and, let's face it, rather unloved set of characters at the expense of doing a big favour for many millions of car buying households. And where, incidentally, were those tribunes of the people, Australia's Labor Party? They went along, too, as quoted in the AFR article.

A week earlier, by the way, the ACCC had come out with its draft market study into the selling of new cars. The media release said that "Complaints to the ACCC about new car manufacturers have risen to more than 10,000 over the past two years. Our draft report highlights the urgent need to address widespread issues in the industry". Not, in short, a sector that deserved ongoing favourable treatment, and I'd argue that the protectionist moat they're allowed to live behind is precisely the source of those "widespread issues" the ACCC found.

This latest proactive ACCC market study was another good example of the progress market studies can make to advance consumers' interests and promote more effective competition. So it's a shame that our own Commerce Commission isn't going to be able to do the same thing. As MBIE has said (at the foot of this webpage) the Commission isn't going to be able to start ones off its own bat: "The Commerce Commission’s market studies power will only be exercisable at the direction of the Minister of Commerce and Consumer Affairs", and then only after the Minister has satisfied an (as yet to be defined) "I smell a rat" test.

Still, it's something, and I suppose we should be somewhat grateful for the half a loaf we've got, or might eventually get. " Parliament", MBIE says, "will need to legislate for change to the Commerce Act for the market studies power to be introduced".

Oh goody. The most recent change to the Commerce Act - the Commerce (Cartels and Other Matters) Amendment Bill - took only five years, ten months and one day to go through the sausage factory.

Another blast from the past

Statistics NZ's Twitter feed just posted this fun item:

It has a link back to a piece that Stats published in 2012, 'Delving into the clothes basket - tracking women's and men's clothing in the CPI', which went back to 1924 to look at what men and women and children wore.

It's fascinating - today's girls will be pleased that they don't have to wear the woollen bloomers of 90 years ago, and today's women will be pleased they don't have to make their own clothes - and it's one of a terrific series of time capsules that Stats have unearthed and published. Last time I wrote about them, in 'The way we live now', I said that this analysis of past CPIs was "almost a complete social history in itself". It's also a great timewaster, so cancel an hour, head to my post, and follow up the links there to the various Stats publications.

For me - and here I stress this is my take, not Stats' view or interpretation - the clothes basket piece fortuitously showed the potential benefits of trade liberalisation. From the late '80s onwards, tariffs and quotas on clothing imports were lowered or abolished. The results were that clothes prices have risen much more slowly than prices more generally (as the first graph below shows) and people have been able to buy much more (as the second one shows).

And the "cost"? - "the number of jobs filled by paid employees in the clothing and knitted product manufacturing industry fell nearly 60 percent – from 9,550 to 4,120". Four million people, give or take, got a large benefit, while 5,500 people, give or take, lost their jobs. And I put "cost" in apostrophes because many - maybe all - of those people will have found other jobs, and in activities that the community values more highly than keeping a small-scale rag trade going.

It's also very likely that liberalising clothing imports was a progressive move (in the tax policy sense of "progressive" as opposed to "regressive"). At home, the household budgets of lower and middle income families, and particularly those with children, will have had one of their bigger costs reduced. And overseas, people in poorer countries will have got real jobs, instead of aid, and started down the road of economic development that will make them better off and, along the way, better customers for our exports. That's a pretty good outcome all round.

More evidence of free trade payoffs

Post-election, thoughts have turned - finally - to policy. It's reported in the Herald that among the likely policy initiatives over the next three years, John Key "identified progress on a trade deal with South Korea, which is close to a conclusion, and the Trans Pacific Partnership as priorities".

A bilateral deal with South Korea is definitely a good idea: I know, in an ideal world we've have comprehensive multilateral trade agreements, but it's not an ideal world, and take what you can is the order of the day. These bilateral agreements can be quite handy: our agreement with China, for example, gave us a clear competitive advantage against the Aussies in the dairy trade with China (as I wrote up here).

Whether the TPP ever gets off the ground, and whether it will in fact be a genuine free trade agreement, is anyone's guess. There have been leaks about the negotiations that have raised suspicions of TPP as potentially protectionist of US intellectual property, rather than helping to free up trade, and I've also seen speculation that the Japanese will make sure that any agricultural trade liberalisation in the TPP will get watered down to meaninglessness.

One worry I've got is that a 'bad' TPP will taint the arguments for free trade, which tend to struggle at the best of times against the loud voices of anti-trade ideologues and of formerly protected interests. The voice of the family buying cheaper T-shirts and food tends not to get much of a look in.

So I thought I'd just point to some new research about one of the big free trade deals - NAFTA, the North American Free Trade Agreement of 1994. At the time the usual suspects came out in force against it: you might remember Ross Perot running for President in the US in 1992 on fears of the "giant sucking sound" of American jobs going down the gurgler towards Mexico (and finding nearly 20 million American voters to agree with him).

The latest research comes from the Peterson Institute for International Economics in Washington, "a private, nonprofit institution for rigorous, intellectually open, and honest study and discussion of international economic policy...The Institute is completely nonpartisan". The summary is here and the whole thing (pdf) is here.

How did this contentious agreement work out? Pretty well, as it happens, though one of the lessons is that proponents of freer trade need to be more realistic about the payoffs: it's not just the opponents that can go off the deep end. That said, the benefits were real: look at this.

This shows the initial level of  goods trade between the NAFTA countries (blue), the extra trade that would have happened in any case as the NAFTA economies grew (dark green), and the impact of NAFTA (light green). Trade was basically twice as large as it would have been without NAFTA. That's a bit of a heavy-handed summary on my part,  and the authors are more nuanced, but the guts is that trade got a large boost.

This increased trade in turn fed through into higher incomes everywhere. As the authors say, these higher levels of trade boosted GDP in all the countries involved (I've left out the footnotes):

Ample econometric evidence documents the substantial payoff from expanded two-way trade in goods and services. Through multiple channels, benefits flow both from larger exports and larger imports. As a rough rule of thumb, for advanced nations, like Canada and the United States, an agreement that promotes an additional $1 billion of two-way trade increases GDP by $200 million. For an emerging country, like Mexico, the payoff ratio is higher: An additional $1 billion of two-way trade probably increases GDP by $500 million. Based on these rules of thumb, the United States is $127 billion richer each year thanks to “extra” trade growth, Canada is $50 billion richer, and Mexico is $170 billion richer. For the United States, with a population of 320 million, the pure economic payoff is almost $400 per person. 

The same is true of the proposed agreement with South Korea, as MFAT's briefing page on the negotiations points out:

An independent joint study into the benefits and feasibility of an FTA was completed in 2007. It found that New Zealand and Korea are two of the most complementary economies in the Asia-Pacific region and that an FTA would deliver economic benefits for both countries. The analysis, by the New Zealand Institute for Economic Research and the Korean Institute for International Economic Policy, suggested that the FTA would provide gains to real GDP between 2007 and 2030 of US$4.5 billion for New Zealand and US$5.9 billion for Korea.

Opponents of trade liberalisation, in short, would take US$10 billion of benefits from a Korean agreement alone, and scatter them to the winds.

The payoff from a Free Trade Agreement

Last week the Business Council of Australia released a report, Building Australia's Comparative Advantage, which in turn built on another report, Compete to Prosper: Improving Australia’s global competitiveness, which they had commissioned from McKinsey Australia. I haven't read either of them fully yet, and I'm not too sure whether I buy into the "let's aggregate industries into globally competitive sectors" line taken in both of them, but in any event I also found this:

This is McKinsey's estimate, in Aussie cents per kilogram, of New Zealand's cost advantage over Australia in the international dairy trade. The total advantage in our favour is 55 cents per kg, which looks a sizeable amount in the context of (say) the dairy payout, and the largest part is down to our cost advantage in getting into the Chinese market duty-free as a result of our free trade agreement (FTA) with China.

You can also see the contribution of the FTA in the graph below, also from McKinsey, where after a short post-FTA lag, our dairy exports to China took off. Aussie dairy exports didn't. For completeness, I should add that McKinsey also credit the relative vigour of our dairy industry deregulation ("Australia...deregulated but without anything approaching the intent and ambition across the Tasman", p35), which I agree with, and also admire the creation of Fonterra ("New Zealand created a dairy industry structure that was designed to compete globally", and Australia needs "purposeful market design", p36), which I'm more ambivalent about, but there's no denying a big payoff from our free trade approach.

It's not often that we steal a diplomatic march on our friends across the sea - well done, our trade negotiators - and we may not enjoy it for long: their Business Council is recommending that Australia get a move on with FTAs with China, Hong Kong and Taiwan, and revisit existing ones to make them more agriculture friendly. But while it lasts it's a fine example of how free trade has brought a big benefit to one of our major export industries. And even if Australia levels the playing field, there will still be enduring pay-offs for both of us.

It's also a good riposte to some of those ugly anti-China views that are surfacing in our election campaign.

Two happy endings

Yesterday I went through the story of how an Aussie company looked to get protection against imports of tinned peaches and tomatoes, and was shown the door by the Aussie trade authorities, whereas here in New Zealand Heinz Wattie's successfully managed to keep the same South African tinned peaches at bay when MBIE once again renewed anti-dumping provision against them.

The Aussie authorities were right: righter than Maggie Thatcher turning right in Wrightington. It was always a protectionist absurdity that 23.5 million Australians should have to pay over the odds for their peaches just so that 3,000 SPC Ardmona employees should have guaranteed jobs (and cushy ones at that, as documented here). And that tends to be the stitch-up that lies at the heart of a lot of protectionism - damages spread thinly over large populations, benefits concentrated on the favoured few.

That's something that should give even anti-trade activists pause for thought. Even if you are way down the protectionist end of the political spectrum, you might want to ask whether dearer food, shoes and clothes for the whole of lower and middle income New Zealand is a price worth paying to maintain much smaller groups of manufacturing employees in their comfortable lifestyle.

And while this is an argument of no economic merit whatsoever, I'm going to make it anyway, since the anti-trade lobby tends to include assorted anti-globalisation and xenophobe loonies who might buy into it. How do you feel about import protection for those poor threatened workers on the SPC Ardmona cannery line - when the company is actually a subsidiary of Coca Cola? And even if you weren't a loony, you'd reckon that companies the size of Coca Cola can look after themselves, thanks very much, without also being granted an official licence to rip off the Aussie consumer.

In any event, there's a happy ending.

SPC Ardmona, reeling under the impact of these dastardly cheap imports, asked for A$50 million in government assistance ($25 million each from the Federal government and from the state government of Victoria). No dice.

End of terminally endangered company? Not quite.

One fan of SPC product, alarmed that it might disappear, started an online promotion campaign that hit a nerve in Australia, and went viral. The whole story's here (and lots of other places). Sales soared, Woolworths decided it was worth stocking more of the iconically popular brand, and SPC was back in business, with the CEO saying “I'm not being cute when I say this, but the refusal of that $25 million from the Commonwealth, it triggered this huge response from the public and that’s led to Woolworths saying the customer is right". At the risk of overkill, I'll just add that a bit of smarter marketing was always a better option than either the protective moat or the handout.

The heading to the post mentions two happy endings: here's the other one. Happy-ish, anyway: there are some good bits in the bag, and hopefully more to come.

The outright good news is that, in the Budget, the government suspended anti-dumping provisions that had been in place against various construction materials, and it did it for the very good reason that it would make the Canterbury rebuild cheaper and more competitive. You might well wonder why what's good for the Canterbury goose isn't good for the national gander, and why the rest of us have to put up with overpriced peaches and diaries (I'm not making this up, Chinese and Malaysian diaries are also apparently threats to the national welfare). But in any event it's another small victory for freer trade, even if it's only a temporary, three year, suspension of the anti-dumping provisions, so let's bank it.

The other goodish news is that the suspension of the construction materials barriers triggered a review of the whole anti-dumping shemozzle, and MBIE has come up with a discussion paper, where it usefully gives marks to three policy options.

Option 1 is the status quo (meh, 14/30). Option 2 is a clunky thing that to me is there to make up the numbers (though with 19/30 even clunky alternatives beat the status quo). Option 3 is the only thoroughbred in the race (25/30). This allows for discretion not to impose anti-dumping duties "where they substantially lessen competition" (as they often do) or "where negative impact on another party [like you and me as consumers] outweighs harm to domestic producer" (which again will often be the case).

Free trade often struggles to prevail against producer interests, but even so this should be the easiest, "where do I sign", shoo-in of a policy contest that's ever been run.

A tale of two "protections"

When I was looking at the Australian Productivity Commission's reports as background for my previous post, I discovered that somewhere along the line the Aussie Productivity Commission had drawn the short straw, and had been made the regulatory authority for what are euphemistically called "safeguard measures", or in other words emergency "protection" against imports.
And so in June 2013 the Aussie government asked it to look at the case for "safeguard measures" against those wicked underminers of the Australian economy, and of Aussie firm SPC Ardmona in particular: imports of tinned fruit and tinned tomatoes.

In December last year, the Commission ruled on both. It said, go away.

On fruit, it said:

"The domestic processed fruit industry is suffering serious injury. However, injury was not caused by an increase in imports of products under reference...Other factors have caused the injury, including: decreasing domestic demand for processed fruit; rising domestic costs of production; and decreasing export volumes. Also playing an important role were domestic competitive pressures in the retail sector, where the availability to the supermarket chain of the option to import provides the threat of reduced margins for SPC Ardmona, but where the choice of that strategy is, ultimately, a domestic decision".

On tomatoes, it said:

"While absolute imports have not increased in a sudden, sharp or significant manner during the period under investigation, domestic production has fallen significantly. This has caused an increase in the ratio of imports to domestic production that passes the test in the Agreement on Safeguards. The domestic processed tomato industry is suffering serious injury. However, the injury was caused by other factors, including domestic competitive pressures emanating from decisions made by supermarkets, the appreciation of the Australian dollar and floods in the tomato growing regions of Victoria".

SPC Ardmona had also stirred Australia's Anti-Dumping Commission into action against those damned South African peaches. No, I don't know how the Aussie Productivity Commission and their Anti-Dumping Commission share the waterfront, either, but it doesn't matter, since the Anti-Dumping Commission also told SPC to go away. It said it was "satisfied that, in relation to [two South African exporters], the goods exported by those exporters have been dumped, but the dumping margin is less than two per cent and, therefore, has decided to terminate the investigation".

Three cheers for three small victories in the never-ending battle for free trade.

However.

Back on this side of the Tasman, MBIE drew the short straw and got to do the anti-dumping stuff. Here, Heinz Wattie's has been on its case about those damn peaches, and with considerable success. It got anti-dumping duties imposed in 1996, and again in 2007/08. They were due to expire in 2013, but Wattie's made another fuss, said they still needed the protection, and got it. The duties were renewed yet again, as you can read here (I warn you, it's a rather turgid, technical read, though trade policy wonks may conceivably like it).

You'll be pleased to know that MBIE is also protecting us from those awful cheap peaches from Greece. Oh, and Spain.

So my question is this. If even the easy-to-stir-to-protectionism Aussies - remember the terrible fireblight on our apple exports? - have flagged away trying to keep out peaches and tomatoes, why are we persisting?

Two minds with but a single thought, two hearts that beat as one...

I didn't realise, when I posted some criticism  the other day of plans to restrict foreign ownership of New Zealand housing, that the New Zealand Initiative was taking a broader view of our barriers to all kinds of overseas investment. As it happens, they arrived at the same place I did, but on a much wider and more deeply researched basis. In their latest publication, "Open for Business: Removing the barriers to foreign investment", the Initiative's Bryce Wilkinson and Khyaati Acharya let rip about the illiberal and inefficient shortcomings of our Overseas Investment Act.

"The Act is not fit for purpose as it stands...No public policy case appears to have been made that gaps in other laws and regulations relating to immigration, national security, land use, takeovers, mergers and acquisitions, or competition are so serious as to justify the Act’s most costly and intrusive provisions. Any populist view that such restrictions and impositions on foreigners are a ‘free lunch’ for New Zealanders is seriously wrong. In short, the Act is seriously deficient from a public policy point of view, with a strong bias against both inwards foreign investment and New Zealanders’ property rights" (p35). And they've got a bunch of liberalising recommendations (pp37-9) to improve matters, all of which look sensible to me.

I was particularly struck by their comment, in regards to foreign ownership of land, that "the principle should be to identify precisely what it is feared that a foreign owner could do to the land with impunity that a New Zealand owner could not do with impunity". Quite. As far as I can see, much of the recent brouhaha over foreigners buying Auckland houses has been based solely on their foreignness, and not on any rational examination of what's wrong with their purchases (nothing, in my opinion).

It also occurred to me that investment liberalisation, along the lines the Initiative argue for, is exactly what you'd want to do if the latest OECD analysis of our low productivity is correct.

You might recall that the Productivity Commission published a report last month written by three OECD economists, "An International Perspective on the New Zealand Productivity Paradox". One of its conclusions was that we are not as well plugged into global value chains ('GVCs') as we might be: these chains are "a wide range of value creation beginning from the development of a new concept to basic research, product design, supply of core material or components, assembly into final goods, distribution, retail, after service and marketing (including branding). Participating in these segments of a GVC enables firms to capture world demand without having to develop a whole supply chain and full set of underlying capabilities" (p27), which is why they would be so handy for a smaller economy like ours. Currently, we're relatively unconnected to these global supply chains, as the chart below (from p28) shows, so we're missing out.

But as the OECD authors point out, "Participation in GVCs often involves increases in trade and FDI [foreign direct investment], which enables countries – China being a prominent example – to develop industries and narrow the technological gap vis-à-vis the world frontier over a short period of time".

What we ought to be doing, in short, is making it as easy as possible for overseas firms to operate part of these chains in New Zealand (ideally the better paying, upmarket bits). Seen from that perspective, moaning about migrants isn't just xenophobic: it's also blocking the linkages we need to build to become better off.

The real issue with Hugh Laurie

There's been quite a lot of media coverage about who said what to whom in the supposed stoush between Hugh Laurie and Immigration New Zealand  over a work visa - see, for example, Hugh Laurie's spat with Immigration NZ - and I've been waiting for someone to make the most obvious point of all, and the only serious takeaway from the whole thing, but nobody has. So here it is.

Why on earth does Hugh Laurie have to apply for a work visa in the first place?

Or the Rolling Stones, or the Berlin Philharmonic, or JK Rowling, or Billy Connolly, or the Indian cricket team, or anyone else coming for a concert, or performance, or sports or book tour?

Nobody seriously imagines that Immigration is going to turn down any of these applications: they're a completely futile formality. So why do them?

Presumably (if there's any good policy reason at all) it's because if we let Hugh Laurie in to work, next thing the country will be swamped by itinerant Indian applepickers.

Well, I've got three thoughts about that.

One, I've got no problem with the applepickers arriving, either. And neither do the farmers who'd like to employ them. And I don't see long queues of the New Zealand unemployed waiting at the farm gate for those applepicking jobs.

Two, why hasn't someone had the wit to devise a visa-free process for the Berlin Philharmonics of this world instead of the makework nonsense we currently have?

And three, what sort of image do we want to present to the rest of the world? We're supposed to be on the side of the non-protectionist angels when it comes to free movement of goods and services, money, and people. Why are using this footling process that achieves nothing except the occasional burst of bad PR?