Services exports – another NZ weak spot

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.

services exports small OECD

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.

NZ services exports

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).

T&T services X

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.

non T&T services X

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.

X education

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.

 

10 thoughts on “Services exports – another NZ weak spot

  1. As a service export provider, I think I can say a few things about this sector.

    Firstly, I’d split services exports into New Zealand-in and New Zealand-our exports. The former would encapsulate tourism and education services, the latter things like IT or in my case financial services.

    I can’t comment on the former, but in the case of the latter, an exchange rate>NZD/0.70 made life difficult as o have to price to market. Secondly, there is No – Nada – Nome help from any NZ Government official if you’re doing anything that’s tangential to their tech/education/tourism obsession – so any business development you do, you’re on your own. Thirdly, NZ’s distance from markets is a huge negative – I write this from a hotel in New York, jet lagged after a (typically) unpleasant flight on Air NZ/United.

    Bottom line really is, an my business is no exception, you’re in NZ because of family, friends and lifestyle, not because it makes any rational economic sense. NZ-our service provision faces a horrible up-hill battle and I honestly can’t see it going anywhere… I’m constantly being pulled to relocate to Singapore or London and if it weren’t for those family and social links, I’d be tumble weed…

    Liked by 3 people

  2. How can Estonia out perform NZ in services % of GDP ? Surely services is where you need communication and the international language of business is English not Estonian. Estonia is in Europe but Tallinn to Berlin and Paris is over 1500Km and 2500Km so it is not as if its potential customers are close neighbours. NZ has historic ties to England but also Australia, USA and Europe whereas Estonia was behind an iron curtain for most of my life so surely we have the face-to-face personal knowledge that is supposedly the secret of business success?

    The growth of middle class expenditure has been strong in China, India, Indonesia, Taiwan and surely those are the places that ought to be sucking up our exports both services and goods. While Estonia has a very slowly growing and much smaller natural market in the EU.

    I have never been to Estonia but have always wanted to; the pictures of Tallinn with its quaint medieval buildings are most attractive. Are they hiding a thriving education market so when I get there the streets will be full of foreign students like Queen St in Auckland?

    If any Estonian is reading this please tell us the secret of your success.

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    • The EU is a very big potential market for a v small country.

      A weekend in Tallinn from anywhere in Europe is a similar proposition to a weekend in Akld/Wgtn from Sydney or melbourne. But there are only perhaps 15m people on the east coast of Australia and several hundred million in Europe. (And Tallinn looks prettier than our cities.)

      Estonia is also known for very efficient e-govt.

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      • Bradford CBD looks prettier than our city centres.

        Efficient e-govt – does it make a difference? Does it help exports? Admittedly I’d love to merge my Auckland library card, leisure centre card, goldcard, fuel discount cards, voter identification, etc.

        Ref your middle paragraph – does Estonia have more tourists and do they stay longer? My family live in Lille and York and they have a hundred cities they can spend a weekend in whereas an Australian can choose Bali or Auckland/Queenstown.

        Your figures show Estonia three times more effective exporting services – is it flooded with tourists or foreign students or is it some other service I can’t imagine.

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      • In fairness to NZ – and I’ve never been to Bradford- I’m betting that the physical locations of both Akld and Wgtn look better than Bradford (Tallinn also a port city).

        I don’t know much detail about Estonia either, but my hunch is that being in the EU and offering relatively cheap labour (within the EU) will matter quite a bit.

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  3. As we provide cheap labour for Australia.

    Physical locations agreed – I can only think of Edinburgh in the UK as giving either competition for physical location. And as an Aucklander I doubt any city wprldwide can match Wenderholm as a slice of heaven on earth. But human beings wreck God’s work and Auckland CDB is instantly forgettable – probably its main virtue – and getting worse.

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  4. Quick look at Estonia:
    ” various transport services (over 40% of all services) are offered to foreign companies and citizens, but the other main services include travel (nearly 24%) and business services (almost 19%). Add to that computer, communication and telecommunication services (8.5%), construction services and some others. Of transport services, transport by sea has the greatest importance, with the conveyance of goods and passenger traffic both very significant parts of it. Transport is accompanied by extra services that provide a significant portion of export income.” http://www.estonica.org/en/Economy/General_overview_of_Estonian_economy/Exports/

    For sea transport, https://www.euro-maritime.com lists 50 Estonian shipping companies. How many can NZ boast?

    For construction, our construction companies don’t seem able to perform well in NZ, much less sell their competence to Australian or other clients. And, of course, our high immigration means that they are fully occupied building houses and infrastructure here.

    So Estonia really does have real service exports.

    Liked by 2 people

  5. International Students – New Zealand 49,800 in 2017, Estonia 5,047 in 2018

    International Tourists
    – New Zealand 3.82 million in 2018 with average stay of 19 days
    – Estonia 3.5 million stayed in accomodation and spent a total of 6.5 million nights in Estonian accomodation in 2017 which does indicate weekend trips.

    So Estonia has found some other form of service export.

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  6. “It’s election year, so maybe it shouldn’t be a surprise that, according to (for example) the Herald’s account, there’s a “Rethink on foreign home-buying” underway, with various parties suggesting monitoring, controlling, restricting or banning it.
    With the possible exception of gathering some data, this is a truly awful policy line to take.
    We have an asset that’s come into strong international demand (and which we’re capable of building more of), and we want to stop the people willing to pay us high prices from getting out the cheque book? What sort of madness is that? It’s as if the Aussies decided that their own manufacturers weren’t getting coal or iron ore cheaply enough, so they won’t sell any of it to the Chinese.
    Let’s face it: this is protectionism, pure and simple, and one of the things we know about protectionism is that it is a self-defeating, negative sum game. Both the ‘protecting’ country and the countries being ‘protected’ against end up worse off than they would have been if they had been allowed to trade freely with each other.”
    https://sciblogs.co.nz/the-dismal-science/2014/04/15/bad-economics-and-contemptible-politics/

    The answer is “no” although I’m not entirely sure why. Would I be surprised if Tibetans rejected my request to by land in Tibet? Is land a product? Are all products the same? Is everything for sale?

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