New Zealand: the foreign trade failure

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.)


Contemplating trade restrictions and industry protection

I’m just back from a family holiday in sunny south-east Queensland.  Being a New Zealander, I have a visceral fear of snakes, but as we saw them only in the zoo, one could concentrate on the upsides of Australia.   Seriously good newspapers for example.  Daily surf swims in the middle of July.  Plastic bags in plenty of shops (Queensland seems to have outlawed – the very useful –  thin supermarket bags but not others).   And, of course, one could look around, and read the papers, and contemplate what productivity and higher material living standards really mean.  It was a while since I’d been in Brisbane, and the central city certainly had a look and feel more prosperous than what one finds in Auckland (or Wellington).

At the turn of the century, GDP per hour worked (PPP terms) was about 31 per cent higher in Australia than in New Zealand, and on the latest OECD estimates than gap is now 41 per cent.    And it isn’t as if Australia itself is some stellar productivity performer.  (Those with longish memories may recall a time barely 10 years ago when there was serious political talk of closing the economic gaps with Australia, but –  as a result of policy choices of both National and Labour governments –  the gaps have just widened.)

I couldn’t see state-level GDP per hour worked data for Australia,  but there is GDP per capita data.  The gaps between New Zealand and Australia aren’t as large for per capita income as for labour productivity, simply reflecting the longer hours the typical New Zealanders engages in paid work over their lifetime.  For Australia as a whole, GDP per capita (PPP) terms is “only” 34 per cent higher than in New Zealand.  In Queensland –  with below average state GDP per capita –  that gap is “only” about 25 per cent.   Even a 25 per cent difference purchases a lot of (say) cancer drugs, new cars of whatever other public or private goods and services people aspire to.  I’m sure the Australian health system has its problems, but I was struck reading three papers a day over 10 days not to see stories about health underfunding.    And yet the (various levels of ) Australian governments spend a smaller share of GDP (35 per cent) than New Zealand governments do (38 per cent).

So there was sun, surf, papers, productivity in Queensland.  And there was another thing I always look out for abroad.

trout 2

I prefer fresh but the little supermarket near where we were staying “only” had smoked.  Not, in this case, the Australian product but (so I was surprised to notice when opening the packet) Norwegian.

trout 3.jpeg

The wonders of a global market and all that.   But just not in New Zealand.

There are, of course, plenty of trout in New Zealand –  all descendants of trout introduced in the 19th century (it isn’t exactly a native species).  In fact, some of the trout species in Australia was introduced from New Zealand.

But if there are lots of trout in New Zealand, the only way you can consume any is to go and catch one yourself, or make friends with someone who fishes for them and who will gift a trout to you.   It is as if I could only consume milk if I owned a cow or had someone close by who would give me milk.  Perhaps the first half of that sentence did describe much of the world prior to the 20th century, but even then the sale of milk wasn’t banned.  But the New Zealand government has for decades now banned the sale of wild trout.

When I went looking, I discovered that the sale of other trout isn’t outlawed in New Zealand, but as a recent regulatory impact statement prepared by the Department of Conservation put it.

The sale of trout (except for wild trout) is allowed in New Zealand. The reason it is not available for sale is because there is no way to obtain trout to sell – trout farming, selling wild trout, and importing trout are all prevented by legislation or the CIPO.

(that’s a customs import prohibition order).  The prohibition extends to smoked trout.  Here is the latest version of the restriction, just renewed a few months ago.

Read literally, clause 4(1)(b) appears to suggest that the imports for sale are only prohibited if they are for amounts of less than 10 kgs.

trout 4.png

That can’t have been what was intended, but it appears to be what the law says. [UPDATE: I misread it.]

There was a policy process undertaken last year that led up to the government’s decision to renew the import ban.  It was weird policy process, described thus

There has been no public consultation on the options covered by this paper. The views of the various interest groups are well known to officials, but there may be Treaty implications if a firm decision was taken without formal consultation with iwi. The nature of the issues mean that a decision has to be made as to which set of interests should be given precedence.

Officials –  of course –  consider they know all that needs to be known.  And quite Treaty issues arise in respect of foreign trade in a species itself introduced to New Zealand is beyond me –  but fortunately I’m no longer a public servant.

Of the official agencies that were consulted, MFAT actually favoured allowing the import restriction to lapse. I’m not usually a fan of MFAT –  and had Beijing objected for some reason, no doubt they’d have taken the other side –  but well done them on this one.  It isn’t a good look when New Zealand prattles on about open trade, rules-based orders, when it maintains in place a near-absolute prohibition of the importation of an innocuous, but tasty, food product.

I guess no one looks to the Department of Conservation for high quality and rigorous policy analysis, especially on economic issues.  Their RIS on the trout CIPO did nothing but reinforce those doubts.

The entire official case for the prohibition of imports of trout (and, by implication, for continuing restrictions on domestic trout farming –  although that isn’t the focus of this particular policy process) appears to rest on supporting the recreational trout fishing industry.

22. The import prohibition and the prohibition on the farming of trout are aimed at protecting the New Zealand wild trout fishery.

Like, for example, banning deer farming to protect hunting of deer in the bush?  Or pig farming?  Or salmon farming?

The officials even acknowledge that (for example) allowing the sale of salmon has not led to widespread salmon poaching, and that other countries successfully manage to have wild trout fishing and trout sales.  But, they plaintively suggest, New Zealand is somehow different.   For example

If imported trout could be sold, the illegal sale of wild trout would be much more difficult and costly to detect.

Which is, of course, not an argument for maintaining the existing restrictions but for removing both import and domestic sales (and farming) restrictions, not continuing to run industry assistance to a small tourism sector –  somewhat akin to the protection that used to be offered to the New Zealand car assembly industry or the New Zealand television assembly industry.  You get the impression reading the document that the DOC officials have simply got all too close to their mates in Taupo, and are subject to regulatory capture.

The documents contains this paragraph

42. The Government’s objectives in regard to the issues examined in this paper can be summarised as follows:
• Maximise recreational and tourism values of wild trout fishery
• Maximise employment and economic values of wild trout fishery
• Maximise economic growth and employment opportunities in the wider economy
• Provide for maximum consumer choice in purchasing decisions
• Minimise risk of friction in negotiations with trading partners.

These objectives are not referenced to any fuller document in which “the government” makes its case, and they have the feel of being made up on the fly with little or no supporting analysis.   They go on to state

43. The interactions between these issues mean that it is not always possible to progress all of these objectives simultaneously. Actions that could advance some of the objectives may restrict progress on other objectives. Decisions on which objectives should be given precedence therefore need to be made by elected Ministers.

In a way, of course, that is true.   If your goal is to maximise the size of the protected sub-industry, whether buttressed by direct subsidies (think film), import bans (trout), domestic production of a related product (trout farming ban) it will conflict with overarching goals about consumer choices and economic efficiency (as well as that lesser goal about living the words about a free and open economy with respect to trading partners).  But, as in so many industries in the past,  that tension should be resolved in favour of the consumer and of economic efficiency.  In this case, it isn’t even clear that there really is much of a tension.  DOC’s RIS offers not the slightest evidence that allowing imports of trout meat (smoked or otherwise), or even allowing domestic farming of trout, would make any difference whatever to the number of North American anglers who come to Taupo.  Perhaps on the domestic side there might be a smaller number of trout fisherman…….in the same way that a much smaller proportion of us milk house cows, collect our own eggs, or whatever than we once used to.   The only “value” really being protected here is that people who don’t go fishing shouldn’t be able to eat trout in New Zealand.  If that is a values-based policy framework, it is a pretty weird one.  Logically, one might apply the same daft policy to native fish too.

It is really quite shoddy advice, in support of shoddy policy.   As one gets to the end of the RIS one gets the impression a reasonable number of government departments are beginning to conclude that the policy around trout is a nonsense and should eventually be revisited.   But it isn’t clear that DoC is among them –  then again, they are probably brought up to dislike all introduced species (may not even be too keen on people, disturbing that natural environment), and they simply aren’t the agency that should be responsible for an issue of industry protection policy and interfering with the ability of New Zealanders to easily consume a safe and lawful product.

There was petition last year seeking to introduce trout farming in New Zealand.  Whether it gets anywhere, only time will tell, but it is hard to be optimistic when the current government extended the existing import ban again only last year.   Perhaps New Zealand consumers will have to hope that foreign governments will take up the issue more seriously, and put more sustained pressure on the New Zealand government to remove the barriers between consumers and trout (more cheaply and efficiently than holidaying abroad).


Over-egging the pudding

Yesterday it was one of our leading political journalists suggesting of the proposed agreement between the EU and New Zealand

But a free trade deal with Europe has the potential to be transformative for the entire country, with the potential to grow this little rock-star economy even further.

And today on Stuff we find Business New Zealand’s chief executive Kirk Hope, suggesting that such a deal would be the “holy grail” (this is in fact the headline in the hard copy version), and ending by asking

Could now be NZ’s long-awaited hour?

That scale of benefits is about as well-grounded in fact, and unlikely, as the creative literature around the grail itself.

It would be one thing if a genuine free-trade agreement were in prospect –  although even then the scale of the possible would scarcely be transformative for New Zealand –  but Kirk Hope, and everyone else from the Minister on down, knows it isn’t.

But he seems determined to keep up the spin

Such deals are central to NZ’s prosperity

Well, no.  There are, probably, some modest economic benefits that have flowed from some of deals done over recent decades, but not even MFAT would claim for the China-New Zealand deal the scale of benefits Kirk Hope wants to claim (the entire increase in New Zealand exports since then).   Such assertions are nonsensical, without foundation, and arguably worse than that.   People discredit the worthy, indeed noble, cause of free trade with such over-egged claims.

And ‘central to our prosperity” in a country that has experienced barely any productivity growth for five years, and where overall exports and imports as a share of GDP have been shrinking?

Then there is the questionable, not entirely straightforward, representation of New Zealand’s trade with the EU countries.

New Zealand is well known as an agricultural producer, but we are more than just that – our services trade to the EU made up 41 per cent of our total exports in 2017.  These ranged from the education and training industry to financial and insurance services, alongside professional services such as engineering and architectural consultancies.

Well, yes, no doubt.  But as I pointed out yesterday by far the largest component of New Zealand services exports to the EU (or the euro-area) is in the form of Europeans taking holidays in New Zealand.  Export education also ranks quite high on the list.  Neither is likely to be affected at all by any EU-New Zealand deal.

Canada and the EU reached an agreement a few years ago (the Comprehensive Economic and Trade Agreement), still not fully in force because of obstacles in the ratification process.  I had a quick look round to see what the estimates were of the gains to Canada.

I found a study by the Canadian Parliamentary Budget Office. It won’t be the last word by any means, but equally it wasn’t just done by a couple of backroom opponents of the deal.  This is some of what the study says of that deal

  • CETA will lead to some gains for Canada, but they will be modest.
  • Canada and the European Union have different tariff levels going into the agreement. Canada’s tariffs are higher on average (weighted). Canadian and European exporters both faced tariffs greater than 10 per cent on almost 500 products (Harmonised System, 6-digit level).
  • Canada will gain in terms of increased economic output (almost $8 billion, or 0.4 per cent of GDP, over the long term) and investment (0.6 per cent of GDP), even though the trade balance deteriorates. Greater specialisation and increased production efficiency lead to net economic gains.
  • The diversion of trade to the EU will reduce Canada’s exports to the United States by more than a billion 2015 dollars over the long term. To the rest of the world, by another third of a billion dollars.

The predicted gain (in the quantifiable areas) to GDP is 0.4 per cent (not very different from the 0.5 per cent estimate –  from an EU study –  bandied around in talk of a New Zealand deal), for a country that is reducing its tariffs by more than the EU will be.  That wouldn’t be the case in a New Zealand deal –  and recall that tariffs mostly hurt the citizens of the country that imposes them.  It is also good to see, amid all the talk of possible increased EU-NZ trade, estimates of the extent of trade diversion: one of key risks/costs of such preferential agreements.

None of this is to suggest that the Canada deal is bad for Canadians (or Europeans for that matter), just that if there are gains, they are small.  It is most unlikely to be any different for a New Zealand-EU agreement.    And whatever the trade effects, reaching behind respective borders to constrain the freedom of governments to regulate, or not, is pernicious, chipping away at the flexibility of elected governments.  That might be part of the raison d’etre of the EU hierarchy, but it isn’t supposed to be the New Zealand way.

Perhaps the clue to this over-egged, utterly unconvincing, piece is in the final paragraph.

To pull off an FTA with the EU would be an outstanding achievement for this still-new Government.

Anyone can do a deal, the question (as yet unknown) is the character and quality of any deal.  But from the tone of that final comment, one might deduce that Hope’s column is more about trying to curry favour with the new government –   business and the government being offside on various other issues –  than it is about serious analysis.  Stuff should probably have charged him for the sycophancy: advertising space rather than the business op-ed pages would have been a better positioning for it.

(What was going to have been today’s more substantive post will be along later.)

Some scepticism about EU trade

Count me more than a little sceptical about the agreement the government and the EU are planning to negotiate over the next few years (should be EU itself survive long enough –  the latest threat being Italy).   It isn’t even clear how to describe the proposed deal.  Champions seem to like to talk of “free-trade agreements”, but of course this will be anything but on the trade side (no free trade in agriculture is in prospect), with lots of more regulatory stuff in the agreement as well, often in areas that are likely to impose additional burdens on economic activity or constrain the government’s future freedom of regulatory action.  Throw in some additional bureaucratic overhead in various areas, and perhaps the proposed agreement should just be called “Agreement between New Zealand and the EU on sundry matters”.  New Zealand officials and ministers have long been aggrieved that the EU wouldn’t negotiate such an agreement with New Zealand, so for them it is, no doubt, a win.  Whether it is much, if any, of a win for New Zealanders is another matter.

Peak hype seemed to be reached in Stacey Kirk’s column in the Dominion-Post this morning in which we are told

But a free trade deal with Europe has the potential to be transformative for the entire country, with the potential to grow this little rock-star economy even further.

That would be the “rock-star economy” that has had almost no productivity growth for the last five years, and where exports and imports as a share of GDP have been shrinking?

And when Kirk says “transformative”, it must just be intended to sound good.  A couple of paragraphs later, we read

But early estimates suggest an EU free trade agreement could add another $1b-$2b to New Zealand’s annual GDP over time, with a 10 to 22 per cent increase in trade volumes.

Since annual GDP is already around $280 billion, even on those numbers it is a gain of perhaps 0.5 per cent.  I know productivity gains have been in short supply in New Zealand recently, but on no measure is a 0.5 per cent gain (probably arising over 10-20 years) anything resembling “transformative”.

Government releases have noted that total two-way trade with the EU is around $20 billion at present ($22 billion in 2017). Of that, around $4.5 billion is with the UK, which is leaving the EU next year (and where the New Zealand and British governments plan to sign their own agreement).

But it is worth noting that we import a lot more from the EU than we export (exports are about two-thirds of imports).  That isn’t a problem at all, but it is a reminder that from a New Zealand perspective, this agreement isn’t about $22 billion of trade, but about $5.6 billion of exports to EU countries other than the UK.  Stacey Kirk tells us that “the cost of importing European goods would be significantly reduced”.  That doesn’t seem very likely as most of our tariffs are low already.  More importantly, if we wanted to achieve those particular gains (however large they are) we could do it tomorrow: just lift the tariffs we impose, and which tax our own people.

And what is it that New Zealand firms export to the EU?

Major goods exports $m 2017
Meat and edible offal           1,543
Fruit              649
Wine              562
Fish, crustaceans, and molluscs              233
Optical, medical, and measuring equipment              205
Major services exports
Travel services           2,369
      Business travel               91
      Education travel              209
      Other personal travel           2,069
Transportation services              437
Other business services              224

By far the largest items are “other personal travel” (holidays) and meat.    There are no tariffs (or quotas) on EU people holidaying here –  so no gains from the mooted agreement there –  and meat seems likely, on past EU form, to be a considerable sticking point, where any gains are small and quite a long time coming.   “Educational travel” also seems unlikely to offer any gains.

If we focus just on trade with the euro-area (the summary numbers SNZ provides –  and the biggest difference between the EU and the eurozone is the UK) personal travel and meat are still by far the biggest exports.

But, as already noted, it is just goods and services.  On Kirk’s telling

The final deal with include requirements around sustainability and climate change, labour standards and animal welfare.  Parker has already suggested that New Zealand might face barriers over whether its goods and deemed to be environmentally friendly or sustainable enough.

Intellectual property isn’t an area in which the EU is known for its liberal approach. Thus, in the same newspaper this morning, trade consultant/lobbyist and former MFAT staffer Charles Finny notes that

Patents for medicines, geographic indications (such as Parmesan cheese), data localisation rules and investment will all be difficult to resolve.  This will also be one of the first negotiations where New Zealand will be arguing for provisions on gender and indigenous issues.

What?  Finny points out that we have an indigenous chapter in the New Zealand agreement with Taiwan.   In it the two sides commit (p199) as follows

2. The Parties shall, through their coordinating authorities:

(a) hold at least one meeting each year for the planning of measures designed to enhance economic, cultural and people-to-people contacts between the indigenous peoples in the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu and New Zealand’s Māori;

(b) promote and facilitate the exchange of experiences relating to indigenous peoples’ issues, including the following areas: economic and business development, tourism, natural resource development, artistic performances, agricultural production, culture, language promotion, education, human rights, land ownership issues, employment, social policy, biodiversity, sports and traditional medicine;

(c) promote and facilitate the development of direct contacts with or between academic institutions, non-governmental organisations, local government bodies and tribal authorities, to support these endeavours;

(d) promote indigenous personnel exchanges in academic, cultural and business exchanges through conferences on a rotation basis, including educators, cultural workers, language instructors, writers and artists, linguists, and ethnologists;

(e) promote stronger relationships between Māori exporters and importers in the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu;

It might be mostly bumpf, but it all costs money, and involves the state going where it really has no business.  Then again, I don’t suppose the EU will be agreeing to recognise that rights and interests of the Catalans.

Perhaps too we’ll find everyone in New Zealand required to adopt something very like the incredibly onerous new data protection and privacy regime just coming into effect in the EU.  And for what?

Assessing any economic benefits depends a lot on the specific details of any agreement that might be reached (and ratified –  as the EU/Canada agreement illustrates, ratification is no sure thing in Europe).  But I noticed some results from a paper ,with an interesting discussion of the potential issues relevant to New Zealand and including some modelling, done a couple of years ago by some Lincoln University researchers.  I can’t speak to the quality of the modelling, so am just passing on what I read.

A scenario of full trade liberalisation between the EU and New Zealand was modelled. Whilst an unlikely outcome of the free trade negotiations between the EU and New Zealand, it is an important indicator of the most extreme potential economic outcomes of more likely moderate agreements. This scenario can be thought of as the upper-bounds of any trade agreement outcomes.

(remarkably, this scenario includes New Zealand removing remaining tariffs on milk powder imports)

And here is their summary of the modelling results (again, for a full liberalisation scenario)

Importantly these results show that for the agricultural commodities considered in the modelling exercise, total producer returns in both the EU and New Zealand are expected to increase, be it marginally. The most significant changes would be for apple production and returns in New Zealand which rise significantly, whilst sheep and wool returns are expected to drop slightly. Most other changes are marginal, although wine producers in New Zealand are expected to experience an increase in returns of almost 10 per cent even given a drop in production.

In another article in the last couple of days we read

Dairy Companies Association executive director Kimberly Crewther said New Zealand dairy exports to the EU were “highly constrained” and the elimination of all existing tariff barriers should be a priority.

“In 2017, just 9000 of the more than two million tonnes of butter consumed in the EU was imported. Maintaining this level of protection does not make sense when the EU is a competitive dairy exporter in its own right.”

A laudable goal –  indeed, getting to the crux of the issue – but I doubt anyone thinks it is going to happen.  This simply won’t be any sort of agreement providing for free-trade.

I would commend the government on its decision to exclude ISDS provisions from future agreements, and the Minister’s comment here

“At the start of negotiations, we’ll be releasing a package of information outlining our negotiating priorities for this agreement and how we will be engaging with New Zealanders as negotiations progress,” David Parker said.

suggests the beginnings of a more transparent approach.  But it is far from clear that there are net benefits to New Zealanders from the sort of deal the government is actually likely to conclude.  No doubt, some classes of firms will be a bit better off –  and those gains will be concentrated, so those interests will be vocal –  but there are many areas in which New Zealanders as a whole could find themselves potentially worse off, and with the potential for future governments to take a different stance constrained by an ever-more-complex web of international agreements.

I’m all for free trade.  Among an group of (genuine) market economies and democratic countries, I’d also have a pretty much open-slather approach to foreign investment.   New Zealanders would benefit from that. But we’d also benefit from retaining a freedom to regulate, or not, domestic activities according to our own analysis, and our own preferences.  And leaving citizens and governments in other countries free to govern themselves.   But that isn’t what is on offer in this agreement.  There is a risk that it is more about political symbolism –  the interests of politicians –  that of substance that benefits citizens as a whole.

Bad economics from the China Council

For several years, Donald Trump has made much of the bilateral trade deficits between the US and Mexico, and between the US and China.   That rhetoric was to the fore again last week when Trump announced the imposition of steel tariffs.  This was from one of Trump’s tweets on Friday

Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!

I’m not aware of a single economist –  with the possible exception of Trump adviser Peter Navarro –  who regards this focus as meaningful or as sensible economic analysis. At an aggregate level, a country’s overall current account balance is a reflection of the savings and investment choices of its own residents.  Thus, if for some reason one were concerned about a US current account (or trade) deficit, one thing that might make a difference could be a cut in the US fiscal deficit (lowering public dis-saving).

The mercantilist mentality, revived by Trump, sees trade deficits as, in some sense, a loss to the country, perhaps by analogy to the situation of a company running deficits (losses).  But the parallel is simply wrong.  Trade deficits are no more presumptively bad than trade surpluses are presumptively good.   Both can be reflections of bad policies, or indeed of good policies.  To the extent that the purpose of economic activity is to consume, trade deficits typically mean that of what your country produces not much is sold abroad, relative to what is purchased from abroad.  If product isn’t sold abroad it is available for domestic consumption.  And trade surpluses can be indicative of a deflationary impulse emanating from your country –  you are selling stuff abroad (absorbing demand from other people), but not matching that with an equivalent demand for the stuff others have produced.

I don’t want to be read as taking these arguments too far.  There have been plenty of trade imbalances (current account imbalances) that proved to be quite unsustainable, and the subsequent adjustment process was often quite messy and costly.  In the very long-term, and roughly speaking, people consume what they earn.  So sometimes, large aggregate imbalances can be a prompt to review policies.  Large surpluses in a fixed exchange rate country, for example, might finally trigger an upward exchange rate adjustment (as in China a decade ago).

But the argument is even more than usually flawed when focused on individual bilateral surpluses/deficits, which have almost no economic meaning.  That, in turn, is so for a variety of reasons.   At a statistical level, in an age of global value chains, any finished product (especially manufactured products) is likely to have been added in a number of countries, but the country where the finished product is exported from will record all the value in its gross exports.   An Airbus aircraft, for example, might have its final assembly in France.  If the plane is sold to, say, a Turkish airline, the full value of the plane will be included in the Turkey-France trade balance, even though much of the value might have been added by firms in, say, Germany or the UK.

And at an economic level, since money is fungible –  and we aren’t in a world of 1930s bilateral clearing agreements – why should anyone in the United States care whether there is a trade deficit with Canada and a surplus with France, or vice versa?   What is earned in one place can be spent in another.   Almost all of us, as individuals, have a goods deficit with the local supermarket, offset by the primary income surplus derived from selling our labour to some other firm.

At a country level, a country exporting mostly, say, diamonds might have a huge trade surplus with Belgium and Israel (places with specialist diamond-cutting industries), and large deficits with most other countries (spreading consumption more broadly).  What of it?  New Zealand won’t export many dairy products to, say, Ireland or Denmark, but might to desert places with not much of a dairy industry.  And what of it?

None of this is to suggest that there aren’t bad policies, or policies which distort the trade numbers.  But if the policies are bad –  eg China’s restrictions on access to its markets for service sector firms, or lack of market disciplines on firms in some sectors with major overcapacity, large US fiscal deficits when the economy is back near full-employment, or New Zealand policies which, in effect, subsidise export education by bundling immigration access with the commercial product –  they are bad on their own terms, regardless of any impact on particular bilateral trade balances.

But this isn’t a post about Trump and his take on economics. It was prompted by a rather similar outbreak of Trumpian economics from someone local who really should know a lot better.    I wrote last week about the speech from Stephen Jacobi, the Executive Director, of the New Zealand China Council attempting to push back against concerns raised in various quarters about the influence activities in New Zealand of the People’s Republic of China and the Chinese Communist Party.  Jacobi doesn’t have any specialist background on China –  he’s a paid advocate –  but he does apparently have a strong background in trade issues, from his time at MFAT, and subsequently as a lobbyist for trade liberalisation.

But his latest statement, released on Friday, left me thinking he must have put any economics to one side.    We were told that

China trade surplus shows relationship working in our favour

March 2, 2018

New figures out today showing a $3.6 billion trade surplus with China demonstrate the value of our growing economic connections with China, according to the New Zealand China Council.

It does no such thing.   Bilateral trade surpluses aren’t “a good thing” (or a “bad thing”) and bilateral trade deficits aren’t “a bad thing” (or “a good thing”).  They just are.

Here is a chart showing the bilateral goods and services trade surpluses/deficits for the top 25 “trading partners”, taken straight from an SNZ table.

bilateral trade surpluses

It is a mildly interesting chart, but I’m not sure it tells us much about anything, and certainly not about trade or economic policy.   Should we think better of Algeria and Sri Lanka  (which presumably have a taste for milk powder) than of Switzerland and Thailand?  I can’t think why we should.  And I suspect that if the bilateral balance with China ever swung into deficit –  and it does move around quite a bit with milk powder prices –  Mr Jacobi would be the first to (rightly) push back against true local mercantilists suggesting that such a deficit was reason for concern.

It isn’t even as if the trade by New Zealand firms with Chinese firms is extraordinarily large.  It is about the same size as our trade with Australia –  a country with about 2 per cent of China’s population.  Overall exports/imports as a share of GDP aren’t large at all for a country our size.  And here is quick table New Zealand China-based economist Rodeny Jones put out last week

NZ has only middling trade exposure to China by regional standards:

% of exports to China/HK 2017

Taiwan 41%
Australia 37%
Korea 32%
Singapore 27%
Philippines 25%
NZ 25%
Japan 24%
Malaysia 19%
Thailand 18%
Indonesia 15%

Mr Jacobi’s argument has the feel of rank opportunism.   Perhaps that might be acceptable in a corporate lobbyist (although I doubt it in the longer run) but Jacobi’s salary as Executive Director of the New Zealand China Council is largely paid by the New Zealand taxpayers.  We deserve better.

As it is, Mr Jacobi’s questionable economics is just the basis for another bid for New Zealand to maintain its subservient, deferential, attitude towards Beijing, and not get bothered about an expansionist hostile power seeking to exert influence in New Zealand politics.

“We need to see China as more than just a market. In New Zealand, China is looking for a long term, reliable partner which means working hard to build cooperation, trust and mutual respect even despite our obvious differences.

Indeed, the PRC is more than “a market”.  It is the government of a repressive dictatorial state, unable to produce for its own people the sorts of living standards places like Taiwan and South Korea have achieved, with an active agenda –  hardly masked –  of projecting its powerful and fundamentally different values [Jacobi’s own term from his recent speech] into countries and regions around the world, defying international law, and attempting to cow any country that makes a stand for its own values and its own self-respect.  It isn’t a regime worthy of trust, or respect.  Perhaps there are some trade opportunities for individuals, but it should be a clear case of “seller (or buyer –  but the sellers tend to have more concentrated interests) beware”,  in which it is more recognised that every time you defer to the regime, you advance an evil cause.

A bit like our politicians really.  Just occasionally, there is reason to think that perhaps our Minister of Foreign Affairs might take a different view.   There were the very delicately-phrased words in his speech the other day about Chinese activity in the Pacific.  There was the response, in after-speech questions, about the memorandum of understanding the previous government signed with the PRC on the Belt and Road Initiative (“I do regret the speed with which the previous government signed up”).

But what does it amount to?  Here is Winston Peters on Q&A yesterday, from the transcript

CORIN You know full well that the Chinese will be watching every word you’re saying right now. Are you worried that there could be—? They don’t like public declarations about the South China Sea from New Zealand. I know that. Are you concerned?

WINSTON No one has been more respectful of the place of modern China in the world than New Zealand First and Winston Peters.


CORIN So do think there is too much? Because, I mean, we’ve got Anne-Marie Brady’s report. We’ve got Rodney Jones, Michael Reddell, others raising concerns and wanting a debate about Chinese influence in New Zealand – politics, but wider life. Do you think there is too much influence?

WINSTON Look, if you’re concerned about too much Aussie influence when it comes to banking you should say so upfront, and I have. If you think there’s been too much untoward American influence in this country in some ways then we should be upfront and say so, and I have. It doesn’t matter where it emanates from.

And thus our Foreign Minister, in his own inimitable style, but in much the same patterns as decades of his predecessors, trivialises the issue.  Just like Mr Jacobi in that speech a week or so back,

Of course, the other side of politics is no better.   Simon Bridges was also on Q&A.  Here he is on the Belt and Road initiative, a mechanism for Chinese power projection in many countries, partly (but not exclusively) by loading pliant recipient countries up with debt they have little prospect of servicing.

[UPDATE: Just after completing this post I noticed this new report on the debt aspects of OBOR.]

CORIN Give me an example of what the Belt and Road means?

SIMON Well, it means economic opportunity, and what do I mean by that? Infrastructure. You’re seeing China invest significantly in infrastructure around the world–

Never mind the strategic foreign policy perspectives, but there might be some consultancy opportunities for New Zealand firms.  It is reminiscent of Lenin’s line about the capitalists selling the rope they will, in time, be hung by.

I also heard Bridges on Morning Report this morning. It was straight out of the John Key playbook.  We will “engage positively”, and might even (quietly) mention the rule of law, democracy etc, all while avoiding the issues that should matter rather more to other countries, including New Zealand –  the expansionist efforts of the PRC beyond its own borders, and the influence activities in an increasing range of other countries, including our own.  I haven’t yet heard Bridges grilled about his MP Jian Yang, but on what we’ve heard so far there seems no reason to believe that he has departed from the Key/English approach (largely shared by the Labour Party) –  selling out our birthright, little by little, for the proverbial mess of potage.   Keep the deals flowing for the selected business elites, keep the party donations flowing and never mind any self-respect, or frank discussion of the nature of the regime, and the nature of the threats it poses.




The costs of Brexit

That was the theme of a presentation in Wellington on Monday, organised by the research institute Motu, by visiting British economist Richard Harris.  Harris is a professor of economics at the Durham University business school, but had apparently spent some time at Waikato early in his career.

The presentation was promoted as an update on the Brexit negotiations, seven months into the two year Article 50 notice period.  Of course, it takes not much more than a cursory glance at your British media outlet of choice to know that things are not going that well, not helped by the tenuous hold on office the current government has.   Competing agendas all round don’t help either.  Plenty of people in the British government –  and the Opposition –  didn’t want to leave.  For them, minimal change from the status quo would be the best outcome. But for those who actually favoured Brexit that solution would, understandably be anathema –  the goal for many of them was to restore the UK’s freedom of action to that of a typical sovereign state.    And on the other side, some countries face pretty bad outcomes if there is a hard British exit.  For others it isn’t much of an issue. For some it might even be an opportunity, to attract multinationals –  including in the financial sector – that have operations currently based in Britain.    And although everyone knows that rising trade barriers comes at a (likely) cost to all countries, the EU doesn’t want any other countries –  or regions –  getting the idea that leaving the EU was a serious option.

Harris’s presentation helped me see more clearly where the EU “divorce bill” demands are coming from, and put the numbers in some sort of context.  At present the UK pays a net 14.6 billion pounds a year into the EU, and the sort of numbers observers like the FT think the EU might accept are only the equivalent of two or three years’ “membership fee”, in a club that apparently operates five year budgets.  At present though, as the FT observes, a number acceptable to Brussels would be “deadly” in Westminster.

It was also interesting to see some numbers on how restrictions on trade between the UK and the rest of the EU would rise if there is no trade deal and the two sides fall back to trading on WTO terms.   On goods, tariffs would rise from zero at present to around 4.4 per cent on average.   On services, where barriers are mostly non-tariff, the restrictions would rise from a tariff-equivalent of around 2 per cent to something nearer 8 per cent.   In principle, the UK could offset this to some extent by securing early trade agreements with other countries –  including countries that the EU does not have deals with –  but good deals, with significant countries, aren’t likely to be secured easily or quickly.  As various commentators have noted, the EU-Canada trade agreement took eight years. New Zealand is already among several countries objecting to early EU/UK proposals to divvy up agricultural import quotas.

Even though there is a lot of talk about smoothing the customs barriers between the UK and rest of the EU –  including on the Ireland/Northern Ireland border –  to faciliate, for example, the value-chains in manufacturing that rely on the seamless movement of goods, there doesn’t seem to be any great optimism as to whether any of these schemes can be made to work well.   That matters, even more than to the UK, for Ireland in particular, which has a very large share of its trade with the UK (and not just with Northern Ireland).  The Irish have been making opportunistic bids to try to semi-detach Northern Ireland from the rest of the UK.

It was pretty clear that Harris hadn’t voted for Brexit, and didn’t support it now.  But he had a pretty hard-headed assessment: the decision had been made and there was no imaginable way it was going to be reversed.   He couldn’t see how effective deals could be in place in March 2019, and even talk of transitional periods beyond that had all sorts of (technical and political) problems.  He envisages a pretty “hard Brexit”, and is very gloomy as to how the UK will cope.

In fact, that was one of the odder aspects of his talk.  He presented a (familiar) chart showing that in the 20 years to 2007. British productivity growth had been faster than that in most other major advanced economies.  But since 2007 there has been no productivity growth at all in the UK.  No one quite knows why, or even how much of what we see might be measurement and how much genuine.  Performance has been poor recently, but that has nothing apparent to do with Brexit.

And yet Harris used this record to claim that if Britain was to take advantage of Brexit, it needed to have a high productivity economy to benefit from comparative advantage.  He said it twice, so it presumably was an intentional statement.  But Stage 1 economics students learn that everyone has a comparative advantage: economy B might be better at producing all sorts of different goods that economy A (that’s absolute advantage), but comparative advantage just tells you that economy A will nonetheless be occupied producing the things it is relatively less bad at producing.     Misunderstanding that point didn’t fill me with confidence in the rest of the presentation, although I’m guessing he just meant that one might be more optimistic about British economic outcomes –  in or out of the EU –  if it was managing decent productivity growth now.

Harris did present the results of a couple of modelling exercises that have been done on how large the real economic costs of Brexit might be.  They usefully highlight that the costs won’t just fall on the United Kingdom –  indeed, one of them envisages job losses (transitional presumably) twice as large for the rest of the EU as for the UK (the EU is of course much larger).    There are losses in this scenario because, even with full free trade with the rest of the world (which won’t happen any time soon), there are typically fewer profitable trade opportunities with places further away than with places close to home (one of NZ’s problems).

In one paper (by Vandenbussche et al), it is estimated that the level of British GDP will fall by 4.5 per cent in a “hard Brexit”.   What I hadn’t realised –  or thought about before –  is that Britain might not be the biggest loser.  In this particular model, Irish GDP would fall by almost 6 per cent, and that of Malta –  with close historic ties to the UK –  would also fall by 5 per cent.    If a 5 per cent loss of GDP seems large, no one really knows the likely absolute magnitudes. Harris quoted estimates from another study by Dhingra et al: they in turn had bad and less-bad scenarios, but the central estimate of lost GDP for the UK was around 2 per cent.

There is a pretty widespread view among economists that these costs, whatever the precise number, are both large and avoidable.  Of course, they might be avoidable, if Brexit was to free up Britain to adopt far-reaching microeconomic reform and liberalisation.  Sadly, that doesn’t seem remotely likely at present –  and of course, many of the costly restrictions the UK imposes now (eg land use restrictions) are entirely home-grown.

Instead, economic elites lament the choice to exit the EU and wish, longingly, that it could be reversed.  That sentiment is perhaps particularly evident in places like the IMF and the OECD –  and Harris cited quite a bit of material from the latter organisation, which has an institutional bias away from the national in favour of the multinational.

I suspect, by the tone of the questions, and the sympathetic murmurs when Harris made particular points, that there weren’t many people in Monday’s seminar who were sympathetic to Brexit.  I am.  Were I a Brit, I’m pretty sure I’d have voted for it –  although, in truth, I’m not sure I’ve ever voted in New Zealand for a programme that might reduce GDP per capita by 4 per cent.  But Brexit has just never seemed primarily like an economic issue, and that seems to be the difference between the public –  polls suggest they are still pretty evenly divided as they were last June –  and most economists.

And so I stuck up my hand and suggested that if we’d been doing this sort of modelling 60 years ago, as territories pondered the possibility of independence from Britain, the results would surely have shown that, for almost all of them, they would be worse off economically than if they’d stayed with Britain.  (And that modelling would never have allowed for the gross mismanagement that followed in many of the newly independent African countries in particular).  And yet if they had been presented with estimates of a 5 per cent loss of GDP, how many would have turned down the chance to be independent – to be free?  Even now, decades on, few probably regret the independence choice –  Somalis might be an exception.   The essence of my point of course was along the lines of why shouldn’t Britons today make a similar choice about the EU.  (And, of course, a 4 per cent loss of productivity sounds big, but it is the loss of 2 or 3 years productivity growth in normal times, invisible over a 50 year horizon.  Adding another week’s annual leave probably reduces GDP per capita by a couple of per cent.)

I’ve made this point here previously, but I was interested in how Harris was going to respond to it.  His response was to acknowledge that many Scots had certainly favoured independence, even at an economic cost – although of course they, like the Quebecois in the 1990s – decided to stay part of the larger country.  But then he fell back on avoidance, arguing that the issues were different for India or Zambia, as their cultures had been squelched by the British etc, and no one could suggest that anything of the sort could be said of Britain and the EU.  Had I had the chance of a rejoinder, I’d have noted that my points would have applied to the choices New Zealand, Australia, and Canada (and Ireland –  although the cultural issues were a bit different) had made to progress towards full economic and political independence.  It may well have come at a cost, but few then –  and fewer now –  will have regretted the choice.  And in all three countries the predominant population was English.  Probably few Slovaks regret their divorce from the Czechs.

Harris’s fallback was that “the EU was always only an economic club, and it remains an economic club”.      That was the conceit of many in Britain.  It was never the vision of the founders of the EU, or of those driving it today.  The very treaties envisage an ‘ever-closer union”, and even today newspapers such as the FT are full of talk of plans for closer banking or fiscal unions, even talk of an EU finance minister.   New entrants to the EU – although not Britain, Sweden and Denmark –  are obliged to commit to enter the euro.  And –  as a matter of conscious and deliberate choice –  being part of the EU means individual nations surrender the right to legislate for themselves in many areas.  That is a (lost, or foregone) freedom that many Britons seemed (and seem) willing to pay some price to reclaim.  If you don’t value the nation state –  or you aspire to some mega European state –  you’ll think that choice irrational.  But most people do seem to value the nation state –  and not just in the UK.    And the British exit polls last year suggested that it was just those sorts of “chart one’s own destiny” considerations that counted with those voting to leave.

Nearly half (49%) of leave voters said the biggest single reason for wanting to leave the EU was “the principle that decisions about the UK should be taken in the UK”. One third (33%) said the main reason was that leaving “offered the best chance for the UK to regain control over immigration and its own borders.” Just over one in eight (13%) said remaining would mean having no choice “about how the EU expanded its membership or its powers in the years ahead.” Only just over one in twenty (6%) said their main reason was that “when it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it.”

In the end, who knows whether it will matter much.  All the modelling assumes that the EU itself carries on much as it is.  A pessimist – perhaps an optimist –  might wonder whether the EU itself will last in its current form for much longer.  Public opinion in other EU countries seems to ebb and flow.   The next recession –  whenever it is –  is just going to accentuate the tensions already apparent in many countries, given that few EU countries have any material “fiscal space” and the ECB is likely to go into the recession with interest rates already at or below zero.  Perhaps in the end Britain will prove to be a pathbreaker –  something the eurocrats and EU-oriented elites must fear very deeply.

Harris concluded with a couple of slides making the point as to how little trade New Zealand firms/individuals and those in the UK now do.   He was inclined to the view that, therefore, what happens around Brexit doesn’t really matter to us.   I’m not sure he is right there –  even setting aside wishful thinking about full free trade between us, including in agriculture.    Even in the transition, a disruptive hard Brexit is the sort of event that could –  in the wrong circumstances –  matter for the world economy in 2019.  And for a small country, looking to materially increase its export orientation, we should certainly be hoping that a country of the size and sophistication of the UK can make it –  and prosper –  alone.  If they can’t, it wouldn’t bode well for us.

Reflecting on foreign ownership

[An Australian website yesterday reproduced, without my permission, my entire post on the new government’s immigration policy, running it under the heading “Is Jacinda Ardern a fake?”.   That heading does not –  even in the slightest –  represent my view.  I’m assuming the new government will do as they said in their manifesto.   And while I’m a bit sceptical as to how committed the new Prime Minister really is –  the policy having been adopted under her predecessor and she never having talked about it in public fora – the point of the article was (a) that the policy itself does not represent any significant change in the likely future contribution of immigration to population growth, and (b) that various overseas commentators have taken the, quite clearly laid out, Labour policy as something much more dramatic than it actually is.]

A few weeks ago, my 14 year son, mad-keen on ancient history and starting to study economics as well, brought home from the library a book about the economy and society of ancient Greece.  I’m not sure he read much of it, but I found it fascinating.   Among the things I learned was that the ancient Greek states, Athens most notably, generally banned foreigners – even resident foreigners – from owning land.   These states were typically actively engaged in international trade, and often encouraged foreigners with particular specialised skills to settle among them.  So it clearly wasn’t an autarkic approach –  some sort of isolation and national self-sufficiency.

But it caught my attention partly in the context of the change of government here, and the proposed new restrictions on non-resident foreigners being able to purchase existing dwellings.   But the issue goes wider than that, and the ambivalence about foreign investment and foreign ownership of New Zealand assets dates back decades at least.    And the Labour-New Zealand First agreement commits to

“strengthen the Overseas Investment Act and undertake a comprehensive register of foreign-owned land and housing”

This in a country where the OECD already rates our existing restrictions on foreign investment as more severe than those of almost any other advanced country (even if there is some genuine debate about how restrictive our screening regime –  what counts in the index –  actually is).

Of course, the proposed ban (which could yet turn into a heavy tax, to get around FTA constraints) on foreign purchases of existing properties, isn’t really much of a ban on foreign ownership at all.  Non-resident foreigners would be able to purchase a brand new house, with no particular restrictions, but not an existing house.    Since new and existing houses are, to a considerable extent, substitutes –  especially if you aren’t planning on living in the house – it isn’t even clear why the proposed ban would do more than throw a little sand in the wheels.   And land-use restrictions have been the main source of driving house+land prices far beyond sensible levels –  the best alternative use of those resources.   So it isn’t clear why a restriction on non-resident foreign purchases of existing houses will do anything to lower the price (increase effective supply) of developable urban land.   If governments can’t, or won’t, fix the land market, there might be more logic in a total ban on non-resident foreigners purchasing dwellings in New Zealand.   Were there to be strong evidence of a significant effect on our market of such non-resident foreign purchases, I could see a reasonable second or third-best case for such a restriction.  I’d prioritise the ability of our own people –  immigrant or native –  to buy a house+land over the freedom to sell to non-resident foreigners.    That’s a value judgement, but one I’m comfortable with.

To be honest, I’m not sure what to make of the data we have.  Lots of people are quite sceptical of the LINZ data, but I’m still struck by how high the non-resident numbers actually seem to be, at least in Auckland and Queenstown (the numbers are very small elsewhere).   For the first six months of this year, almost 5 per cent of Auckland gross sales were to buyers wholly or partly non tax residents of New Zealand.  In Queenstown-Lakes, the proportion was more than 10 per cent.   There were non-resident sellers as well, of course.  And some of those people (on both sides) were New Zealand citizens –  eg a New Zealander who has settled in Australia, no longer treated as a tax resident of New Zealand, and a few years later sells a New Zealand property.  But at a time when Chinese data show that capital outflows from China have hugely diminished

cap outflows

it is rather surprising how many purchases (net) were still being made by Chinese tax residents, even on the LINZ data with all its limitations.    (In Auckland, net Chinese purchases make up more than the total net foreign purchases –  ie people tax resident in other countries were net sellers.)   And recall that China is the issue simply because the place is currently so badly governed –  absent the rule of law –  that its own people don’t feel safe keeping their money in their own country: we never had an influx of Japanese, French or British purchasers.

With a well-functioning urban land market, sales of houses/apartments to non-resident foreigners  –  even ones that just sat empty –  could be just a modestly rewarding export industry.   But we are a very long way from that sort of well-functioning market.

In Eric Crampton’s piece the other day, he highlighted that the proposed restriction would affect those here on work visas, as well as those who were not resident at all.   If so, that was something I hadn’t realised.   But his argument against drawing the line there wasn’t particularly persuasive

If someone is building a life here, it shouldn’t matter what visa they’re on.

But it does.   If you are here on a student visa, or a temporary work visa, you might well hope you are now on a path to “a life here”.  There might even, in some cases, be an implied expectation that that is how things will turn out.  But New Zealand has not made a decision, at that point, to grant your wish.  It does that only at the point where you get a residence visa (and then permanent residence).  At that point we’ve said you can stay,  but not before.  If there is going to be ban or a tax, I don’t have a strong view on where the line should be drawn (there are avoidance issues wherever it is drawn).  In practice though, not many people going to another country (or even another city) for just a couple of years will buy a house –  the transactions costs are just too high –  so if we are going to impose restrictions, I’m not convinced drawing the line in a place that banned those on temporary visas would be particularly problematic.

But restrictions on non-resident purchases of urban dwellings are mostly a second-order distraction from the real regulatory failures that have rendered house prices here –  and in similar places abroad (eg Australia, UK, California) –  so unaffordable.

Perhaps more sensitive, and more difficult, issues are around other foreign ownership issues.  In reading around how they did things in Athens, I noted that foreigners might not have been able to own property, but they had the same access to the courts as citizens.  These days, however, we –  and many other countries –  go one further and give foreign investors better access to dispute resolution than we provide to domestic investors, through the investor-state dispute settlement (ISDS) provisions included in numerous preferential trade and investment agreements, including TPP (and presumably the replacement for it, now close to finalisation).    I wrote about these provisions back in 2015, quoting a writer for the New Yorker

“these provisions have been opposed by an unusual coalition of progressives and conservatives”

and a contributor to –  not exactly left-wing – Forbes magazine that ISDS provisions represent a

“subsidy to business that comes at the expense of domestic investment and the rule of law”

In a country with a good quality legal system, it should simply be offensive and unacceptable that we provide foreign investors access to different courts and dispute settlement procedures, under different rules, than are available to domestic firms (even in the same industry).   Equal status before the law is –  or was –  one of the cardinal principles of our democracy.    At very least, citizens should always have at least as good rights as non-citizens or non-residents.   (And that should apply to our citizens when operating in other countries, relative to the citizens of those countries –  but that is an issue for those governments, not ours.)

What of the foreign investment itself?

There are easy cases, at either end of the spectrum.  I don’t suppose anyone much is going to have a problem with a foreign investment fund owning an office block in Queen St.  And I don’t anyone would have opposed restrictions if, say, the Soviet Union had found willing sellers for the whole of Stewart Island.

The hard stuff is where to draw the line between those extremes.   There is a case –  I think generally quite a good one –  for a pretty relaxed view for most potential buyers and most potential assets.  In part, that is a property rights view.  If I own an asset and want to sell it, government restrictions on who can buy the asset lowers, probabilistically, the price I can command.  It is, in the jargon, an uncompensated regulatory taking.     Then again, a lot of the value of any (location-specific) asset arises from choices society has made collectively, about institutional quality, rule of law, good governance etc.  Auckland airport, for example, wouldn’t be worth much if New Zealand were an ill-governed hell-hole.

There is also the argument that the New Zealand and, in time, New Zealanders generally will benefit most if the assets are owned by those best able to utilise them.    When foreign investors bring technology or management expertise to a New Zealand industry or opportunity that isn’t as developed here, it is likely that in time there will be a wider benefit to New Zealand.  That was how, for example, Tasman Pulp and Paper was set up, under government sponsorship in the 1950s.  Or Comalco.  (And, yes, I deliberately choose examples where there might be some doubts as to whether these firms should have established here in the first place.)

There are also diversification arguments.  It bothers some people, but doesn’t really bother me, that most of our banking system is foreign-owned.  There are some possible downsides –  and we might have been better off if the foreign ownership was not so concentrated in Australia –  but my reading of the international (and New Zealand) experience is that we are probably better off (more stable) for having a largely-foreign owned banking system.

There are also bureaucratic competence/incentives arguments. Our current overseas investment act in many cases requires demonstrating that a proposed foreign purchase would be “beneficial to New Zealand”.   Beyond the evidence of, say, a foreign buyer being willing to offer the highest price, how comfortable can we be that officials and politicians have the ability or incentives to make those judgements correctly?

There are also arguments about debt vs equity.    You might, in some cases, worry about control passing to foreign owners.  But if domestic owners are reliant on lots of foreign debt there can be different, but at times more intense, levels of vulnerability.    Debt can be called up, or simply not rolled over.

Foreign investment has played a significant part in New Zealand’s economic history, and its economic development.  Sometimes in quite odd ways: the protectionist insulationist policies of post-war New Zealand encouraged quite a high degree of private direct foreign investment, as the most cost-effective way for foreign firms to get their products into the New Zealand market (inefficient and costly as it may have been for New Zealanders).  But my reading of the New Zealand evidence and data is that foreign investment restrictions aren’t to any material extent what holds New Zealand’s productivity performance back.  It is a more a case of there being too few good profitable new potential investment opportunities, whether for domestic investors or foreign.

None of this is really an argument for a laissez-faire approach, even if I’d still be more hands-off than most New Zealanders might.      National cohesion and national identity aren’t easy to pin down, but are both real and important.  And part of that –  perhaps especially in a small country –  is the control/ownership of land.   I find it quite plausible that there might be international agricultural operators who could add new and different value to New Zealand operations through ownership and management of substantial parcels of agricultural land.  But if, on the other hand, a growing number of wealthy offshore people simply wanted to own South Island stations and install local managers to farm much as they always have, I also don’t care very much if political unease is real enough that we end up simply saying “no” to such purchases on a large scale.  Again, at an extreme, if non-resident non-citizen buyers ended up owning 80 per cent of the land in some locality –  be it Northland or central Otago, or wherever –  then I think we’d have undermined something about what it means to be New Zealand –  given undue weight, including in local government, to the interests of people who aren’t part of this polity – in that area.     A country is some mix of people in some specific place; a bundle of tangible people and land, not just an idea.

How real are those particular risks?  I’m not sure –  perhaps the new register will help give us a better sense.  And there are plenty of countries –  other open liberal societies – that place few or no restrictions on such purchases.    But perhaps things are a bit different in a small country?

And then there are the national security dimensions, which seem to be treated too lightly here.  A standard response is “but the local government can always regulate things” .  I don’t think it is typically an adequate response if, say, a hostile foreign power owned key telecoms networks or ports/airports: regulation and governments just aren’t that good, and can also become too responsive to the interests of the overseas investors.    Of course, confronting this issue also involves identifying the minority of countries that count as potential “enemies” and, on the other hand, which are countries where there is (a) a substantial commonality of interest, and (b) where investors can be reasonably assumed to be working in their own interests, not those of their home governments.   At a time when the Soviet Army was just across the border, the West German government would have been crazy to have allowed Soviet interests to have purchased and controlled major West German infrastructure or technology assets.   We’d have been crazy to sell Stewart Island to Soviet interests.

Today’s Soviet Union is China, with the difference that these investment hypotheticals are increasingly real, used as a direct means of extending political reach.   That is nothing about race, and everything about (geo)politics.  I don’t think that taking these issues and threats seriously means banning all, or perhaps even most, Chinese foreign direct investment.  But it means a greater degree of realism, than tends to have pervaded recent governments, that their interests are not our interests, that all or most Chinese corporates are effectively under the thumb of the government and Party, and that not all voluntary transactions are likely to be beneficial for New Zealand as a whole even if they benefit both the buyer and the immediate seller.

There is no particularly strong conclusion to this post.  Drawing appropriate lines –  and translating them into legal rules –  isn’t easy, and that is often a good reason for restraint.  And yet neither is defining, or  fostering and sustaining, nationhood.  But that something is hard isn’t an excuse for simply ignoring the potential issues.  Part of doing that well is perhaps first fostering a compelling and convincing sense that governments are governing in the interests of New Zealanders as a whole.  Of course, different people will see those interests, and the policies that best serve them, differently –  that’s politics. But finding the right answers –  as perhaps around immigration –  is unlikely to proceed best by simply exchanging slogans.

Reviewing government assistance to business

The Australian Productivity Commission’s latest annual Trade and Assistance Review was released quite recently.  These, statutorily required, reviews contain

the Commission’s latest quantitative estimates of Australian Government assistance to industry

as well as useful discussion and analysis of key recent developments in the trade and industry assistance area.  As the Commission notes in the Foreword to this year’s report

Views inevitably differ on what constitutes industry assistance and whether it is warranted. Fundamental to these questions is transparency of measures. The annual Review seeks to identify government arrangements that may be construed as assistance, as well as their target, size, and nature. This information provides a basis for considered assessment of the benefits and costs of the arrangements.

Transparency  alone usually can’t stop daft policies being adopted or continued, but without good empirical estimates and disinterested analysis it is harder to push back against the special interests lobbying governments for this deal or that.  Such deals are almost invariably dressed up as being in the public interest, but perhaps rarely are.

The Commission highlights one particularly egregious example in this year report –  the decision to build the new submarine fleet in Australia  (characterized by many as marginal seat retention scheme  –  and the Cabinet minister most often mentioned did retain his seat at the recent election).  As the Productivity Commission’s report tartly observes

Paying more for local builds, without sufficient strategic defence and spillover benefits to offset the additional cost, diverts productive resources (labour, capital and land) away from relatively more efficient (less assisted) uses. It can also create a permanent expectation of more such high‑cost work, as the recent heavily promoted ‘valley of death’ in naval ship building exemplifies. Such distortion detracts from Australia’s capacity to maximise economic and social wellbeing from the community’s resources. The recent decision to build the new submarines locally at a reported 30 per cent cost premium, and a preference for using local steel, provides an illustrative example of how a local cost premium can deliver a very high rate of effective assistance for the defence contractor and the firms providing the major steel inputs (box 3.1). While based on hypothetical data, the example reveals that the effective rate of assistance provided by purchasing preferences can be higher than the peak historical levels recorded for the automotive and textiles, clothing and footwear industries prior to the significant economic reforms of protection. It is notable that this cost premium does not include any delays in deploying the new submarine capability.

Effective rates of protection, in 2016, higher than those provided to automotive, textile, clothing and footwear industries in the bad old days of high industry protection.

I wrote briefly about last year’s review, which included material which the Sydney Morning Herald described as scathing attack on preferential trade agreements of the sort that Australia (and New Zealand) governments have been enthusiastically signing.  The Australian Productivity Commission  –  a body strongly committed to open and competitive markets – has a well-established record of skepticism around the wider economic benefits of such deals.  Here is their box summarizing the issues and concerns.

Box 4.1           Conclusions in regard to the merits of trade agreement

The Commission has previously raised questions about the merits of trade agreements (including PC 2010, and the Trade & Assistance Review 2014‑15). The overall conclusions are as follows:

·       Multilateral trade reform offers potentially larger improvements in national and global welfare than a series of bilateral agreements. While the slow progress of the Doha Round of multilateral trade reform has accelerated preferential agreement making, the trade‑diverting effects of bilateral agreements should not be forgotten.

·       Australia gains more from reducing its own tariff barriers than from the tariff reductions of a bilateral trade agreement partner.

·       The benefits of increased merchandise trade emanating from bilateral trade agreements have been exaggerated.

·       Different and complex rules of origin in Australia’s preferential trade agreements are likely to impede competition and add to the costs of firms engaging in trade.

·       The nature and scope of negotiating remits should be assessed from a national structural reform perspective before entry into negotiations, rather than primarily for export opportunities. The text of proposed trade agreements should be made public and a rigorous analysis independent of the negotiating agency published with the final text.

·       The Australian Government should seek to avoid the inclusion of Investors‑State Dispute Settlement (ISDS) provisions in bilateral and regional trade agreements that grant foreign investors in Australia substantive or procedural rights greater than those enjoyed by Australian investors.

·       The history of Intellectual Property (IP) being addressed in preferential trade deals has resulted in more stringent arrangements than contained in the multilateral agreed Trade‑Related Aspects of Intellectual Property (TRIPS). Australia’s participation in international negotiations in relation to IP laws should focus on plurilateral or multilateral settings. Support for any measures to alter the extent and enforcement of IP rights should be informed by a robust economic analysis of the resultant benefits and costs.

It isn’t exactly the enthusiasm of New Zealand or Australian governments for deals such as TPP (although the Commission does not comment at any length on that specific deal).

One can always argue what value publications like these add – given the fondness for daft policies that governments continue to show. But given how badly the incentives are skewed against citizens, provisions that require officials to publish reports of this sort seem appropriate. Information is one of the few tools citizens have to push back.

In New Zealand, the Taxpayer’s Union has done sterling work in highlighting some of the cost of “corporate welfare”, but it might be a good part of improving New Zealand’s economic governance if provisions requiring an annual report of this sort were included somewhere in New Zealand legislation.  At very least, it would help to prompt something like the annual modest round of stories in the Australian media about just what governments are doing  –  and at what cost –  in this area.  In a small country, with a lightly-resourced media, we probably need such official reports even more than Australia does.

Surely we deserve better than this?

No, that was not a reference to the latest release from the Reserve Bank on investor finance restrictions.  We do deserve better from them, but I’ll elaborate on that later.

Somewhere along the line I must have signed up for releases from the Minister of Trade, Tim Groser.  I don’t recall doing so, but this release turned up earlier this afternoon

Good afternoon Michael

There’s been a lot of debate recently about the proposed Trans Pacific Partnership (TPP).

The TPP aims to create a regional free trade agreement involving 12 Asia Pacific countries, including Australia, Japan, the United States, Canada, and New Zealand. These 12 countries have combined a GDP of US$27 trillion (NZ$40 trillion).

If we are able to secure a deal, this would deliver massive benefits to the New Zealand economy. It will help to create more jobs for New Zealanders and lift incomes.

“Massive benefits” sounds good, if perhaps implausible (few things governments do actually deliver “massive” benefits).    Whatever the deal, it probably won’t create more jobs either –  higher returns for the jobs we have, and perhaps some different jobs as we gain from more trade, but you can have full employment under tight controls (New Zealand in the 1960s) or under free trade.

Trade is incredibly important to New Zealand. As a small, island nation we need to trade with other countries to ensure we are not left behind. We can’t get richer by selling stuff to ourselves.

The reason the Government hasn’t released much detail to date is because the negotiations are still underway. Just like any normal business deal and other free trade agreement New Zealand has reached, these negotiations are always conducted with a degree of discretion.

The words “extreme understatement” spring to mind in response to that last phrase.

This is about getting the best possible deal for New Zealand, not a deal at any cost. We are confident we will reach an agreement that is in the best interests of New Zealand

Good to know, but the paragraph no longer has the tone of delivering “massive benefits”.

If we are able to secure a deal, New Zealanders have an opportunity to review it and provide feedback. Any deal will require examination by a Parliamentary Select Committee where members of the public will be able to make submissions. Legislation will also need to be passed, which will involve further scrutiny by Parliament, before it takes effect.

As I’ve already mentioned, we will not be signing a deal that’s not in New Zealand’s best interests. I firmly believe the TPP will be hugely beneficial to our country if we are able to secure a deal.

Since the Minister doesn’t seem to know whether a deal will yet even be possible, how can he be sure a deal will be “hugely beneficial”? It is plausible, perhaps, that a deal might offer huge benefits, but surely a deal that is only just good enough to sign must also be possible – otherwise he wouldn’t be uncertain whether there would be a deal at all. And given the uncertainty about any estimates about the impact of micro reforms, a deal he initially thought to be beneficial to New Zealand could turn out later not to have been so. Or vice versa.

I suppose ministerial missives like this are simply meant to lift the spirits. In this case, I can’t see how it works. If he has nothing concrete he can say, perhaps he should just stick to “we’ll be working hard to reach a deal that will benefit New Zealand”.

And the case for an intensive independent review of the costs and benefits of any deal by, say, the Productivity Commission remains strong.