New Zealand: the foreign trade failure

Michael Reddell Exports, New Zealand economic performance, pandemic, Trade

To have listened to Winston Peters’ speech in Parliament the other day –  which wasn’t all as bad as the media reporting had led me to believe – or the joint Herald op-ed from the New Zealand, UK, Australian, and Singaporean trade ministers, you might have supposed that New Zealand’s was some great foreign trade “success story”.  I put it in quote marks because of course Winston Peters –  our Foreign Minister –  seems to want to undo some of that alleged “success”, seeking “far greater autonomy for New Zealand”.  Here is the full relevant quote

Now, New Zealand First is resolved that our future economy will have these features about it, because they’ve learnt something. One: far greater autonomy for New Zealand. In short, if we can grow it or make it at near competitive prices, then we will grow it or make it, use it or export it, rather than use valuable offshore funds importing it.

Some mix of mercantilism  (more exports good for their own sake) and insulationism (less international trade all round).

And here was a key quote from the article by David Parker and his peers

We are four independent trading nations who have derived success by operating globally. Almost two-thirds of Britain’s economy is made up of trade. One in five Australian jobs is trade related. In New Zealand that number is one in four. Nearly two-thirds of Singapore’s GDP is generated by external demand.

Success story? That would be the country that has spent 70 years slipping, sporadically but decisively (never really interrupted) down the OECD productivity league tables.  Productivity growth, after all, being the main basis for improved material living standards, and for many non-material options.

Here is foreign trade as a per cent of GDP (average of imports and exports) for each OECD country for the latest calendar year the OECD has data for (mostly 2019).

foreign trade as % of GDP

I use foreign trade (imports and exports) to make the point that, for a whole economy, we mostly export to import (some of vice versa as well).  But we are also fourth to bottom if one looks as exports alone.

Perhaps you think that doesn’t really matter much; after all, much richer Australia and the United States have lower trade shares than us.  Unfortunately for that story, larger countries tend to do a lot less foreign trade (as a share of GDP) than smaller ones –   there simply are lots more home markets for firms in the US – and even Australia has a population five times our size.

Ah, but we opened up our economy decades ago –  all that stuff Winston Peters lamented much of –  and we’ve signed all those trade agreements ministers and officials like to boast about.  Surely, then, we trade more heavily than we used to, surely we’ve improved our relative performance?

foreign trade since 1970

But no.    New Zealand’s foreign trade now is a bit less (share of GDP) than it was in 1980, and if we started behind the other small countries, we’ve lagged further behind, especially this century.

And since the OECD only has data for all countries since 1995 here is the NZ vs small countries comparison just since 1995.

foreign trade since 95

I suppose at least the gap hasn’t widened further in the last five or six years.

And then people (reasonably) point out that in some countries –  notably in Europe –  there is a lot of cross-border trade in partly-assembled products.  That is a plus for those countries, whose firms really can gain by specialisation in specific aspects of a production chain, but it does inflate the gross foreign trade numbers.

Fortunately, the OECD has developed indicators of the amount of domestic value-added in each country’s exports  (there is a range of other indicators in the value-added database as well, but here I’m just going to fall back on exports).  In some (particularly central European) countries only just over 50 per cent of gross exports represent domestic value-added.  In New Zealand (and Australia and the US) that share is close to 90 per cent.

So how does domestic value-added in exports look as a share of GDP across the OECD countries (these data are available only with quite a lag, so the latest numbers are for 2016)?

value added exports

It lifts New Zealand slightly up the league table, but all the countries below us have much larger populations –  and domestic markets –  than we do.  By contrast, all the countries to the right of the chart are small (or in the Dutch case just a bit above small).  And of the small countries – 12 million or fewer people (from where there is a step up to the Netherlands) our population is pretty close to the median.

dom value add and popn

It isn’t the tightest relationship in the world –  there is a lot else going on –  but the point that small countries tend to export (and import) more is pretty clear.  And New Zealand –  red dot –  stands out well below the line.

Our trade performance has been –  is –  woeful.  We simply don’t export (or import) much for a country as small as we are. In fact, not many countries –  even very large ones –  export/import less than we do as a share of GDP.

So the self-congratulatory lines that David Parker (and MFAT officials, and a succession of previous National trade ministers) run is deeply flawed.  But at least, in some sense, their hearts are in the right place, seeming to recognise that a more outward-oriented New Zealand is the only sustainable path to much greater prosperity.  From Winston Peters, on the other hand, the idea that we should be importing even less –  in a small country that already imports the fourth lowest share of GDP in the entire OECD –  is just headshakingly bad.

(If perhaps not quite as bad as Steve Keen who proposes that New Zealand and Australia are ideally placed to be some sort of long-term “trade bubble” –  doing as little as possible, even beyond Covid –  with the rest of the world, as if we’ll suddenly become a major market for coal, LNG, and iron ore and they will suddenly become a leading market for dairy, lamb, and export education.)

 

46 thoughts on “New Zealand: the foreign trade failure”

  1. Aussie has around 650k kiwis that they seem to be trying to export back here…. they have sent the worst of them over to test the market…

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  2. No failure in the kiwifruit industry for the past few years and early market indications are that this season is tracking well, although it is early days yet. It is a pocket of success often overlooked by city based media who are still thinking of PSA days. Of course you are looking at the big picture but it is an example of a product we produce and receive a premium price. It has also provided jobs for those displaced by Covid 19 level 3 and 4 restrictions. 750 hectares of G3 licence are being bid for at present so it will be very interesting to see the tender results in a months time.

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    • Yep… the kwifuii export business has been going well and volumes will continue to rise as new plantings come on stream… however, kiwifruit is only about 3% of our overall export trade so its nor really going to ‘move the needle’ on its own…

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      • Met a British cousin for the first time on the weekend – she’d been trapped here during lockdown and was on her way back to Blighty. She remarked on how she was so happy to eat kiwifruit here, only to look closer at the label and realise it was imported from Italy! So it seems the kiwifruit import industry has also been doing ok lately…

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      • Can’t see how Italian kiwifruit competes with NZ kiwifruit when the NZD is almost 45% discount to the Euro. She must be paying twice the local prices.

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    • If one great government slash funds, funded development of automation to make a order of magnitude reduction the amount of labour in the picking, and then we produced that equipment domestically for export that would be progress, otherwise kiwifriut exports are just more the same.

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      • Hmmmm… the automatic picking equipment is more than just grabbing fruit from the vines… its about analysing each fruit and only picking those ready for picking… which is a more complex problem, but would likely life overall yields… but that is still in the future….

        Not sure that NZ will be able to develop the technology by itself as there are numerous companies overseas looking at this for other fruit crops… don’t see much of an export market for it overall…

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  3. As a fairly typical middle class, middle wealth, patriotic New Zealander why would I invest my modest savings in a NZ export business when I can make more money betting on property? Often with my winnings tax free. Like many immigrants I’m more patriotic than the average citizen; occasionally I have noticed New Zealand businesses with potential but invariably they are simply bought out by foreigners. Other than not voting for NZFs fortress New Zealand and cutting out foreign holidays what can I do?

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    • Well I suppose that your attitude is quite common… property so why try harder… if you were in the kiwifruit business the you would have made quite tidy $$ over the past five years participating in the growth there… even if most of the residual value is capture in the land price… (because that is the only bit that is trade able).

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      • We can all be a property expert; harder to be a kiwi fruit expert especially living in Auckland. More likely to find something worth selling to the world if I lived in rural NZ?

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  4. I regularly read an Aussie blog on economics. While people talk about a Trans-Tasman bubble here with excitement, noting all the potential benefits to Air NZ and some of our tourist operations – ski fields etc – the mood in Oz is quite different. There, it ranges from utter indifference to downright hostility. Apart from the odd comment about ski trips to Queenstown, they seem to be totally ambivalent about the whole project.

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    • Comments on articles relating to this topic at The Australian, Sydney Morning Herald, and The Age tend to follow the same pattern. Many seem to see it as a conspiracy to unload masses of unemployed Kiwis into the Australian labour market.

      You would be lucky to find half a dozen positive comments from the hundreds that have been made on the dozen or so articles on this topic that I have read from these outlets over the last couple of weeks.

      May not be a representative sample of Aussie sentiment but probably conveys thoughts many will be having over the ditch.

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      • Interesting. Given the lack of access to Aus welfare for NZers moving there, a flood of unemployed NZers shld probably be the least of their worries. Historically the outflow to Aus is largest when the Aus economy is very buoyant.

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    • The main reasons for the Trans-Tasman bubble would be sports, tourism (we are each other’s biggest markets) and business travel, none of which probably occur to either side.

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  5. Might be some interest on the Gold and Sunshine coasts, but I suspect that even in nz there is quite a distinction between ski field lobbyists and the public more generally. Personally I’m quite keen on freeing things up locally but quite wary about any international flows at this stage.

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  6. Is it any wonder that New Zealand has had such a poor productivity growth performance for such a long time?

    Productivity growth comes from hard work, working long hours, saving and accumulating capital, being careful in how that capital is invested, thinking constantly about how to make your business more efficient and drive costs down and revenue higher. To do this, we need a competitive economy but instead we have cosy monopolies, duopolies or oligopolies, often – no almost always – aided and abetted by government intervention.

    The latest example is our government allowing the duopoly of supermarkets to remain open while forcing New Zealand owners and operated small businesses – grocers, butchers etc – to remain closed. By doing this, they actually forced our population to funnel through points of infection vulnerability rather than trust people and spread the risk.

    Something we’ve discussed many times Michael. I agree with you on the macro side – over focus on immigration and a “think big” population policy driving up the kiwi REER but I think our micro policies have been largely captured by vested interests and we face a lack of competition.

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      • Having had the opportunity to live and work in a number of countries I can attest that NZ has a general lack of competition and absolutely a scale issue. This will not be fixed by, “buy NZ made”. Haven’t we seen that before? And didn’t that go so well? Living in NZ is very expensive.

        I think we still suffer from the “competitive” vestiges of Muldoon. Fletcher building, Spark, being perhaps the most obvious examples. Winstone wallboard still has something like 90% market share I understand fro jib board.

        Many imported products have NZ distributors and it can be hard to get them imported i.e. they are restricted. Thank goodness we allowed parallel importing, especially now that global warranties are more common.

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    • Doesn’t help that we decided to push tourism as a major component of our economy, which is a low productivity industry since it is heavily service-based.

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  7. Further to your post above Michael, I have a number of questions:

    – Which countries (if any) have successfully materially increased (and maintained) their level of exports as a percent of GDP?
    – For those that have achieved such an outcome what were the primary factors that drove this outcome?
    – Lower labour costs?
    – Significant Foreign Direct Investment?
    – Proliferation of internationally competitive domestic firms?

    I guess the thrust of my questions above relates to the New Zealand context in that:

    – Is there any way to materially increase New Zealand’s exports without exploiting any additional latent natural endowments/resources/primary production capability? (i.e. offshore oil and gas, mining (both offshore and onshore), offshore aquaculture at scale etc. etc.)
    – Or in the case that this is not palatable to the New Zealand population is there anyway to materially increase exports without significant increases (and likely concessions to encourage) FDI? (so that perhaps a critical mass of internationally competitive firms may be based here)

    Would it therefore be fair to say that if New Zealand seriously wanted to increase its level of exports as a share of GDP it would need to have either:

    A) A much more open mindset and regulatory framework for resource extraction and primary production (both on and offshore)
    B) One of the most liberalised FDI and accompanying regulatory frameworks (if not the most) in the world
    C) Both of the above

    My sense is we are stuck in a rut (per your charts above) and all the well meaning press releases from trade ministers etc. are not going to make a jot of difference to that trend without A), B) or C) above.

    Into the future the level of exports as % of GDP in a given year will therefore be dictated by the size of the domestic economy, terms of trade, growing conditions for various primary commodities. In the meantime the occasional ‘success story’ will be pointed at to fulfil the role of a Potemkin village for whatever politician happens to be travelling down the metaphorical river at the time.

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    • Well its clearly a problem that has been puzzling for a long time… a while back the Productivity Commission looked into the NZ Productivity Puzzle and came away non the wiser… I might not have this quite right – but at any rate there was no ‘ah ha!’ moment when it became clear what to do…

      I suspect the problem is that across a lot of NZ industries and sectors there are a few large companies and then a large number of small ones… but nothing in the middle. The concept of the ‘Mittlestand’ on Germany and other European countries might be a way of thinking about these ‘missing middle’ firms..

      See this link for an overview of this concept: https://en.wikipedia.org/wiki/Mittelstand

      My personal view is that NZ companies lack the capital to really grow offshore and struggle to get capital – hence the selling out to foreign firms – also foreign firms tend to be better managed and run and can outperform the local firms because they have these skills and resources more readily available…

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      • There’s a whole host of things that must contribute to our low productivity but because we are so small and far away from the rest of the world we have to better and more efficient at a lot of things.

        For a start, having dozens of commissions, councils and authorities – all with relatively high overheads and political type appointees with no skin in the game makes for expensive, slow and low quality decision making!

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    • Might have to come back to you next week, but most countries have increased their export/import shares of GDP over recent decades.

      As a proximate issue, our persistently overvalued real exch rate has been a particular issue since about 2003. Govts can’t control that directly but they need to think in terms of reforms that have the effect of sustainably lower the real exch rate and increase tradables sector competitiveness.

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      • Apologies there was quite a bit there!

        My assumption is that there will be a small group of countries that have over the past 30 years or so materially increased their share of exports as a percentage of GDP at a faster rate than others and that these countries are likely to be:

        – Ireland (FDI flows/tax incentives)
        – Singapore (FDI flows/tax incentives/strategically located entrepot)
        – Taiwan (FDI)
        – South Korea?
        – Various Eastern European countries (labour cost advantages/proximity to Europe)
        – Sub-Saharan countries (exploiting previously unexploited/underexploited natural resources, esp. for the China market)

        I guess as much as there is a ‘roadmap’ to follow on materially increasing exports as a percentage of GDP it would seem that location is important (not much that we can do about that) or you can make choices about being something of a tax haven (or similar) to encourage outsized FDI attraction to attract activity that otherwise would not be located here – although this may well be location dependent also. Or you can dig up more of your country than you were previously.

        Israel and South Korea may possibly be exceptions in that they have built (on the face of it) many globally competitive firms (albeit with a fair bit of state intervention) but does this result in more exports as a % of GDP? Israel and South Korea’s productivity/income/living standards are there or there abouts with ours so even if that has been the case in those two examples perhaps it is truly difficult to reach top levels of income and productivity even with that strategy.

        I do note your point about the exchange rate, there is clearly a noticeable bump in exports in your foreign trade chart which must be related to the historic lows the NZD/USD achieved around 1999/2000.

        Call me cynical but perhaps now is an opportune time for politicians to do as much as they can (via the RBNZ and fiscal policy etc.) to drive the exchange rate down as low as possible. Given New Zealanders can’t go on holiday overseas which is when they would really notice a weak exchange rate. In addition, many imported consumer goods are likely to be facing low demand globally so I am sure that prices for those will remain competitive. Now may be the best time in some time to do whatever is possible to lower the exchange rate as many consumers (voters) may not notice as much as they would have when they could go on holiday to Hawaii.

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      • If we didn’t tax interest income and made all new borrowing non-tax-deductible then might level up the playing field with non-residents, who can choose to pay no tax NZ interest earnings, and bring down the exchange rate a little.

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  8. Michael – Interested in your thoughts around technology and food. If the likes of Impossible foods etc manage to make convincing, tasty and low carbon versions of meat, where will that leave our NZ Agri business sheep/beef?

    Same could be said of soy or plant based milk products?

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  9. NZ is hampered by the ease with which success can move overseas. If a NZ business develops a world beating product that is not closely tied to a NZ resource then it is too easy to move overseas. The heart of the new idea will be a handful of people and they can easily move to Sydney, Singapore, London, New York which is convenient for the customer base. This is not true for most of the countries in that chart because of language. For example Lego could move from Denmark – I’m sure their top people are fairly fluent in English but not their wives and children so they stay put. So how can we keep our talent in New Zealand? Invest in Maori businesses which use Te Reo? Alternatively why not make living in NZ so cheap that nobody wants to leave. If Auckland houses cost say double an annual salary who would move to London? Investing in clean and green would help too – when I can’t swim in NZ rivers and at Auckland beaches because of pollution well I might as well move back to Britain.

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    • Like I said earlier, NZ has to try to be better at everything to make up for our small population and distance away. And that certainly would include having lower housing costs – not as expensive as some of the more expensive places in the world!

      We have a huge amount of mostly relatively unproductive land around our cities, and still a relatively low population density so there is no fundamental reason for our high housing costs!

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      • I am fairly certain that when the previous government set the bar for a in an investment visa at $1,500,000 we soon found asian buyers buying houses in Dannemora with a cv 0f $800,000 going under the hammer for (you guessed it) exactly $1,500,000. That became the investment, now for my residence visa. Thanks for coming. Cost dodn’t enter into the equation. When spec builders with a few smarts saw that they soon bid up the price of available bare land. The number of auctions at Barfoot & Thompson knocking down properties to asian stooges with mobile phones stuck to their ears, jabbering away in mandarin, bidding frantically against like minded people similarly equipped participants, the game out of control.

        It is pointless monday-morning quarter-backing the past now

        The property market industry in NZ is $55 billion per year

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      • I doubt if buying a residence counted towards investment for an investment visa – but investment visas never really work and probably better off auctioning off a limited number of NZ passports (to people of good character) and sinking the money into infrastructure. And those people might still buy a house of course – but not an ordinary old over priced Auckland house!

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  10. No but parking your money in NZ Government Stock did…. its very sad in hindsight.

    the time is coming where the RBNZ will be able to put an upside limit on income/debt lending against residential housing, at the same time we should limit the number of houses any one person can own via company trusts etc etc. its not a hard concept to grasp, investment should be in productive assets not speculation…

    God help us all if we see a 30-40% price correction in the next three years…. it feels like its needed though to make things affordable again

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    • Nope… not the role of Government to force people into investment preferences – although Govt can pull various tax levers to incentivise/disincentivize certain behaviours… although landlords have had a pretty good kicking over the past few years… so that is lilkley (all other things being equal) to lower the stock of rental properties available….

      On the investment side, you have to think about why so many listed companies pay out such high levels of dividends… it as if the domestic investors demand high dividends and expect dividends as a matter of course. This is actually bollocks – dividends should only be paid if the return on capital on additional investment is lower than the dividend yield to investors (more or less)… which means that NZ companies are not seeking out value creating investments… when they think they do… they balls it up… just look at our ‘magnificent’ dairy company for a lesson on corporate hubris…

      Also with housing the pundits have been predicting a 30% – 40% correction for years – has never happened and is unlikely to ever happen… if you think it could happen then you don’t understand the NZ housing market….

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    • If there is a correction, all it will do is replace current home owners with a new batch – a direct swap. Unless the fundamentals underlying high house prices are addressed, in 8 years we’ll be back at current prices, all thing being equal (which they’re not, obviously). The best case scenario in terms of minimal ruined lives would be for prices to stay stagnant and let wage increases take care of the rest. Not nice for those who want to get in now, however, but fine for my preschooler.

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      • In the second half of the 1970s real house prices did drop around that extend (30-40%) but it was disguised by high inflation with nominal prices remaining about the same.

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    • Ha! So you assume that ATEED are actually useful??? My view is that ATEED are pointless to the point of uselessness… and in these times there is even less reason for this muppet infested pile of crap to exist…

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    • We have a whole Ministry for Economic Development, hidden within MBIE. I believe Michael’s description of their attitude toward analysis included the word ‘breathtaking’ (in a pejorative sense).

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  12. Responding to Rascally Rabbit.

    About a month ago when asset markets were on their knees, banks were struggling to obtain US dollars in the cross currency swap market and they had to buy in the FX market directly, which drove a precipitous decline in Kiwi. The RBNZ responded by tapping a US dollar swap facility at the Federal Reserve and supplied a massive amount of US dollars directly to the banks, and kiwi leapt about 12% off its lows. Effectively, the Bank bailed out commercial banks, at the expense of exporters, proving yet again that the commercial banks, and in the background the housing market, remains the dominant political concern.

    I think they did the right thing allowing banks to tap dollars directly, but I think they could have made banks jump through a few hoops first, limiting the volume drawn and assisting in containing the kiwi.

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  13. Hugely important thread.Thank you.
    Productivity was severely damaged from 2003 by overvalued exchange rates.I agree .But most of that excess value come from the highest interest rates in the OECD..That meant our tradable sector could not compete with the rest of the world.
    That on its own sank many primary export industries and NZ manufacturing particularly in the primary sector..Even the iconic NZ Fisher and Paykel had to move to Mexico.

    The small NZ tradable sector, to put it bluntly, was hammered for the social benefit of Auckland housing markets as the Reserve Bank tried to contain this market with the OCR.
    The success or otherwise of RB strategy is reflected in the diagrams in the post and also the loss of many many productive industries.

    My comment is that there must be stability in financial settings ,if we are to trade successfully with the world.

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  14. There has to be a reason to manufacture in NZ, be it perceived value or large home market or technicality. Too often its the first reason and then its sold to an overseas investor and then it is gone. Free trade and Free investment have two very different impacts on the economy.

    We do manufacture and export an odd and eclectic range of products that make up very large percentages of global production (over 50% for a couple of items) or have the majority of the global industry leads locally owned but would we ever know or be proud to do to achieve it. No, we are more likely to give money to American venture capitalists to use NZ for a test capacity with no real expected return (air taxis, driveless cars and medical devices) beyond photo ops while delaying local companies projects to accommodate them.

    This is the dark side of economics, human psychosocially, we (the public) don’t realise how far behind we have slipped (so the overvalued dollar isn’t the political issue it should be, who cares house prices keep going up), we are insufficiently pragmatic (we have some incredible advantages but don’t understand them or develop them, 92% of NZ is below sea level but where is that in our world view or R&D spend), we are too causal with markets (it seems that in smaller domestic markets the availability funding and political influence are the principle reasons for success which then dead ends them for export). This is “for the want of a nail the kingdom was lost” problem, a number of detail traits are ultimately all that is really holding us back.

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  15. I can clearly attest to the fact that we mostly export to import. I am a shipping manager at Rocket Freight (https://www.rocketfreight.co.nz/) and most of the contracts we have are not import from China and Australia as many believe about the industry as a whole, simply because there are so many products on the market from these countries. I always tell people that we do a lot more export than import and they are surprised. Duncan is right though. If we carefully look at statistics, we quickly notice that we are lead exporters of some key electronic equipment. Nobody knows it though because that equipment is not that necessary in the large scheme of things.

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  16. the most successful countries in the world economically are manufacturing ones who believe in free trade but nevertheless still impose tariffs on imports, eg USA, Japan – nzers are naïve. mp

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