Various people in my Twitter feed were highlighting what appears to have been a quite interesting conference in Auckland over the weekend on external-trade related issues. I haven’t seen the papers, but at least from the various tweets I saw I was struck by an apparent air of unrealism, that doesn’t take much account of just how poorly New Zealand has been doing on the foreign trade front. It is a bit like when MFAT and Cabinet ministers talk up this, that or the other new preferential trade agreement – there have been a lot of them over the years – and yet we find ourselves now with foreign trade shares of GDP no higher than they were in (say) the early 1980s. For younger readers, those were widely perceived at the time as dark days – lots of import protectionism, terms of trade very low, CER not yet signed, and so on.
Services in one of those areas that trade experts seem to like to talk about, a lot. Here was an MFAT tweet from the weekend conference.
In a way that isn’t surprising. In the median OECD country, services exports are almost 13 per cent of GDP, and the median increase in that share over the last couple of decades is about 4 percentage points.
But not in New Zealand.
Among the full group of 35 OECD countries, New Zealand has the 10th lowest share of services exports as a share of GDP. But every single one of the other nine are countries that are far bigger than New Zealand: Australia, with almost five times our population is the next smallest. For good and fairly obvious reasons, foreign trade tends to make up a smaller share of GDP in larger countries.
But what about the smaller OECD countries? Almost two-thirds of OECD countries have populations of 11 million or less, and we are by no means the smallest of those countries. Here are services exports as a share of GDP for the smaller OECD countries, truncating the vertical axis because Ireland and Luxembourg are so much higher than all the other countries on the chart.
New Zealand has the smallest share of services exports in GDP of all these smallish OECD countries – and by quite a margin. And it isn’t as if we are closing the gap. Over the last 20 years, services exports as a share of GDP have barely changed in New Zealand (with some ups and downs) while for the median of the other smallish OECD countries, the increase was 6.7 percentage points of GDP.
Now, of course, distance materially and fairly obviously affects quite a lot of what counts as services exports – notably, our two largest classes of services exports, tourism and export education.
Here is a long-term chart showing all our travel and transportation exports (which includes freight and export education).
The picture looked quite promising 20 years ago. Much less so now.
And, on the other hand, here are all the non-travel and transport services exports. These, in principle, should have been where much hope was reposed.
It is, perhaps, a more positive story, but not very much so. After all, despite all the technological advances, and cheaper and better communications etc, this group of services exports is still (in gross terms) less than 2 per cent of GDP, and no higher as a share of GDP than was the case at the turn of the century. As a share of total exports these (non travel and transport) services exports have risen a bit more, but even that increase isn’t particularly impressive, as there has been no growth in these services exports as a share of total exports this decade.
Out of interest, here is the export education component of services exports as a share of GDP.
Ups and downs but – even with all the subsidies to this sector (mainly through the immigration system) – still now below the levels reached in 2004. And it isn’t as if our universities are relentlessly climbing the global ladder, suggesting that fresh waves of new exports – attracted by the quality of the product – are likely from this source.
Now, as experts like to point out, there is a services component in all or most goods exports too. But (a) it isn’t as if New Zealand has been doing well with goods exports and (b) the overall character of our goods exports hasn’t been changing much either (eg lots of fancy manufactured products with a huge design or IP component).
For all the talk, services exports – including the higher-tech ones people like to talk about in such seminars – just haven’t done particularly well in New Zealand.
That doesn’t surprise me. The combination of a persistently high real exchange rate – direct consequence of other policy choices – and the continuing constraints of distance (even for many of what may look like “push a button and it is done” services) seem to me to pretty much explain the story. New Zealand is just not a great location to base many outward-oriented businesses, even as our governments pursue more and more people to live here. It shouldn’t be surprising that the relative size of the tradables sector in New Zealand has been shrinking.
On such matters, I saw that in advance of the weekend workshop/conference, the Herald the other day had a full page profile of MFAT’s leading trade official, deputy secretary Vangelis Vitalis. Rereading that piece, and exchanging notes with someone over the weekend about public sector senior appointments and our new Secretary to the Treasury, I was left wondering why Vangelis Vitalis wasn’t appointed to fill the role. His is an enormously impressive and energetic guy, he knows New Zealand (and is a New Zealander), is open-minded and engaging, and thinks about economic issues and risks. Perhaps he didn’t apply. Or perhaps he just doesn’t fit the Peter Hughes model of safe generic public sector managers. But it does seem extraordinary that the powers that be would pass over – rather than, say, shoulder-tap – such a significant economic and policy talent right here among us, already in officialdom. You can negotiate all the preferential trade agreements in the world, and it won’t matter much for economic performance – lacklustre for decades – unless you get to the heart of the underlying problem.