by frog
The latest statistics from our Overseas Merchandise Trade show that last year we exported $2.0 billion dollars worth of stuff to China. But we imported $5.6 billion dollars worth of stuff.
That’s a total trade deficit of $3.6 billion with China alone (our trade deficit with the rest of the world tells a similar story) – up over $0.6 billion from only the year before.
Business and Economic Research Limited’s (BERL) report to the Industry Capability Network in June 2006 shows that the benefits to the New Zealand economy for every $1m of imports that we replace with Kiwi made goods are:
- The creation of 11.16 jobs
- Government income tax revenue increases by $117,214
- In total an additional $1 million of value added manufacturing results in $2.16 million of initial value plus downstream value added.
In other words, by producing in New Zealand those goods we currently import from China, we could create 62,000 jobs, have $655 million more in taxes to spend on things like health and education and improve our economy as a whole by over $11 billion.
Yet a free trade agreement with China will mean we import more Chinese stuff, not less. So you can start doing that calculation in reverse.
on the trolls and those who are unable to keep on topic
However, you fail to account for the things that we can export to the PRC as well. The PRC, like most nations (unfortunately) have heavy tariffs on their agricultural sector. An FTA with the PRC will of course have benefits for our agricultural industry. That would provide more jobs, now wouldn’t it?
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Thats complete and utter economic illiteracy frog.
You’re assuming that people would purchase the more expensive goods if they were made in NZ, if at all.
Face it, we have almost no tariffs anyway, so any free trade agreement we enter benifits us, as we’ve got virtually nothin to lose. Due to the fact that we got rid of tariffs years ago, we are always going to be the winner on any free trade agreement.
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Mike -
“Due to the fact that we got rid of tariffs years ago, we are always going to be the winner on any free trade agreement.”
But you haven’t shown why that follows. Anyhow – surely that should be assessed on a case-by-case basis? i.e. say free-movement of labour between NZ and China was part of a deal btwn the two countries. Of course that
s going to negatively impact the wages and living standards of NZ workers.
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MikeE – “we’re always going to be the winner on any free trade agreement” is the real sign of economic illiteracy and an adherence to unsubstantiated ideological nonsense. Are you saying that the BERL folks, real economists who have done the sums, can just be waived off because of some ideological mantra from the far right?
How do you substantiate the claim that all of our imports could not be replaced at similar prices by local production? Sure many of our imports cannot. But that does not mean to say that the net benefit to our people and our economy would not be greater with local production even with moderately higher prices for some of those goods.
You’re doing your sums based on over-simplistic mantras rather than real research. Do some real math!
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This kind of thinking really lets the greens down. The fact is that New Zealanders choose to buy $5.6b of Chinese imports. Even one dollar less would be contrary to their demonstrated preferences. They aren’t buying local, probably because it would cost more or the goods would be inferior.
I’m sure that the BERL have got the maths right and producing one million dollars of goods here would employ a certain amount more people and contribute a certain amount of tax revenue and have certain down-stream benefits for other industries. But MikeE is not disputing that, he is disputing whether those benefits are worth it.
Theoretically if you wanted to achieve some optimum of NZ employment and consumer access to their preferred goods then you could mandate certain import substitution so the loss in consumer preferences was outweighed by the gain in local production. The problem is that in deciding the identity and level of import substitutions to mandate, you are committed to believing that central planners can outperform the market at allocating resources. Do you really believe that?
If you do then call me ideological but suffice to say there was a global scale experiment on exactly that topic last century and we all know who won.
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I would have to agree that “we’re always going to be the winner on any free trade agreement? provided the agreement is for trade in goods. Once you include services then it’s a whole different kettle of fish.
“How do you substantiate the claim that all of our imports could not be replaced at similar prices by local production?” I can’t speak for MikeE but I would suggest ERA, RMA, OSH, protectionism and economies of scale are the major differences between Chine and New Zealand. Only the last one is an acceptable difference and the one that has always made manufactured import substitution policies a bad idea. As Sutch pointed out it would be much smarter to invest our limited investment capital into industries that process our exports to a higher value point in the production process.
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“You’re doing your sums based on over-simplistic mantras rather than real research. Do some real math!”
Frog, seriously, this is voodoo economics par excellence.
The cost per job of local car assembly was in the realm of $170,000 – that was how much it cost the economy to maintain local car assembly in the late 1990s – and not one of those working there would earn more than one third of that. Import substitution stagnated Argentina from World War 2 to the 1980s – as it simply did not keep up with the rest of the world (it had per capita GDP akin to that of Western Europe in the 1940s).
If you want New Zealanders employed in the menial non-knowledge based assembly line jobs that are what China is about – then fine, but you either pay similar wages or force consumers to pay many times current prices for socks etc. May not sound like much, but families able to replace their kids’ shoes as they grow up more frequently are far better off than not being able to afford to to prop up uncompetitive jobs.
You can spend $1 on something made in China or $10 on it made in NZ. Only if you spend $1 on something made in China do you have $9 to spend on other things you want. New Zealand is not a homogeneous entity – the trade deficit is not “owed” by everyone – it is just a statistic which you could also draw internally. You may find that Auckland is a major trade deficit region, but Canterbury is in surplus – does that mean that Auckland should produce more? Of course not – it is the nonsense of basing economic policy on the intricacies of national boundaries.
New Zealand’s economy has a preponderence of comparative advantage in certain agricultural products and some service sectors. China essentially has cheap unskilled labour (this wont last beyond 2 generations at most, it didn’t in Japan, South Korea or Taiwan). Making cutlery, socks, shoes and simple appliances is largely labour intensive, so China is efficient in producing those. Accept that, produce what you are good at and get on with life.
The natural conclusion of the philosophy of import substitution is that you are far better off buying nothing ever, but making everything you need from scratch – but you might find you have no time to do what you are good at, and a lot of what you make isn’t very good!
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What Frog is (unintentionally) driving at is that for us to produce goods competitively with China then our production costs are going to have to come down to the level of China’s. To which I say that NZ is already a low wage economy; how much lower do you want it to go?
The other side of the same coin is as we are a low wage economy people simply can’t afford to make the choice to buy Kiwi when it is more expensive to do so.
Given the content of the FTA is not yet public, trying to work out what it means is at this time 100% pure speculation.
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you know quality has declined markedly since we lost our manufacturing capacity. sure kids’ shoes can be replaced regularly, but so can adults’ now that they conveniently fall apart after 12 weeks.
comparitive advantage only exists in an environment of regulated capital flows. china can undercut any other producer of anything by virtue of cheap labour, countries like nz are only comparatively good at “producing” investment goods. sometimes this trade is quite explicit – china needs something, so it signs a contract with a foreign supplier – including the clause that china buys a large chunk of that supplier.
it’s a myth that china’s cheap labour is only doing the dull jobs while us super-creative westerners do all the knowledge-based jobs.
those high-tech industries remaining to us seem to can’t wait to re-locate to china or similar low-wage economies.
specializing in one industry that we can do well in on an international scale seems a great idea while that industry is booming, just as focussing on just one lucrative customer used to seem. the less efficient diversified economy seems more attractive when, due to forces beyond our control, the vagaries of the international market dump on our one specialty.
the burden of the trade deficit falls on everyone holding or earning the domestic currency. auckland doesn’t have its own currency, neither does canterbury.
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Our property market and lifestyle (the free things) are part of the free trade agreement. People leave the UK in search of a better life due to the traffic etc.
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“Making cutlery, socks, shoes and simple appliances is largely labour intensive, so China is efficient in producing those.”
Last I looked, China’s largest export to NZ was computers – it’s not the “low-wage/cheap goods” economy people here present it as.
I think the point of this article is that there’s more than the price of traded goods to consider. If we get cheap goods, but lose jobs, there are going to be other economic costs of importing these goods that are hard to assess.
Likewise one of the effects of importing cheap goods is reducing inflation as things cost less. Problem is, for most people, wages are effectively tagged to inflation, so falling prices just mean falling wage increases and they don’t actually benefit in the long run.
It’s arguable how much removing Chinese tariffs will help NZ’s agricultural sector. Removing tariffs is likely to mean these goods are cheaper for the Chinese consumer, which would be an advantage if we were sitting on a mountain of unsold butter (or whatever) as Chinese consumers could buy more. But we aren’t.
Removing tariffs will make NZ goods more competitive against locally-produced ones, but it’s a moot point as to whether NZ can compete internationally in the long-term, especially as the FTA includes a promise of NZ technical assistance to the Chinese dairy sector (or did last I heard) to help it remain competitive! Regardless of this, it’s only a matter of time before Chinese agricultural production, with the benefit of cheap wages, government investment et al, rivals NZ’s efficiency (The Chinese government doesn’t share NZ’s objection to backing its own industries). NZ is just hoping China can’t meet its own demand.
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Sorry, I meant China is not a “low-tech/cheap-goods” economy.
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DS – why do you assume that I am advocating a centrally planned anything? All I was pointing out was what you said MikeE was pointing out. That we ought to calculate the downstream benefits of doing more locally before we go giving away the farm with preferential trade agreements. That’s all.
It is the unsubstantiated knee jerk reaction that all trade deals are good for the economy that I am questioning. This is an ideological mantra that deserves scrutiny. That is the only point of my post. There is no other hidden agenda.
No one is suggesting a centrally planned economy, or elimination of trade with anybody. The numbers need more work, but they do suggest that previous so called free trade deals that NZ has done have not had a net benefit on the economy.
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Frog-
At the end of the day your argument rests on the same logic as failed central planning policies -that it’s possible for public policy rather than voluntary action to pick which are the best trading opportunities.
There is also no difference between proposing to add more restrictions instead of *not* removing existing ones. Both cases are underpinned by the same belief.
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DS-
The market has its own problems- we generally call them externalities and monopolies. Limited central planning is important in avoiding these deficiencies of the market from dominating the picture.
While I agree that in many cases, the limitations on trade do more harm than good, a lot of these limitations actual prevent externalities from becoming a major cost- by protecting the environment, our labour market, and our product standards. These are very important factors that we should make every effort to preserve before signing a preferential trade agreement.
Arguing against the removal of some trade restrictions where there is evidence to suggest it will increase external costs, for instance by hurting local wages, is highly different to arguing against free trade in principle, and you can and should do better than that kind of ideological dogma. Ideally, we should free up trade only as much as it is beneficial for both parties.
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frog, my response to your Thailand stats has got stuck in moderation. Suffice to say that when the Thailand and Singapore stats are converted to index numbers and plotted on the same line graph both clearly show the tail end of the asian financial crisis, an abrupt downturn in exports in 2000/01, an abrupt increase in both imports exports with Singapore in 2003 and with Thailand in 04/05.
Curiously, following the FTA with Thailand exports to Singapore and Thailand have increased by almost the same percentage as our imports from Singapore, 65%. Imports from Thailand have only increased by 20% since 2005. Something changed in that 03-05 period.
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Ari-
Your argument employs a lot of Econ 101 jargon but is still essentially the same as Frog’s.
Much as it may be theoretically possible to identify, quantify, then correct these ‘externalities’ as exercises in the above class and maybe a few later ones, it’s practically impossible. One reasons is that econometrics just isn’t good enough to give accurate data (and if it was I’d be using it on the sharemarket, not trying to plan the lives of others). The second is that the political system which enables such externality busting is fraught with all the same problems as the ‘market.’
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Three things about the market-
First: The invisible hand does a very good job of coping with the things it can feel. It is however, a hand. It has no ability to see what is coming, no ability to anticipate and no ability to plan. It is a hand with neither eyes nor brains. As such it is inherently and COMPLETELY unsuitable for dealing with what you call “externalities” and what I call “the real world”.
Second: It can’t react to things that don’t have a price signal attached. If you don’t have a price attached to the consumption/destruction of clean air and clean water it will destroy those “free” things as efficiently as it creates plasma TV sets.
Third: The invisible hand also kills.
It wants to be attached to brains and eyes and used intelligently… not worshiped blindly.
BJ
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BJ-
As if the topic was not esoteric enough we now forced to interpret metaphors.
Of course the invisible hand does not have eyes or a brain. It is the result of many people’s (people who all have brains and eyes) collaborative voluntary action, and yields results that no one mind can ever anticipate or consider. That’s why you are absolutely right that it cannot plan, it is the the sum of many many people’s plans executed in a world of voluntary exchange. However I suspect the ‘planning’ you would like to see actually involves canceling those peoples’ plans so they fit with your own.
The problem with that is that because, as you allude to, the ‘planning’ of the invisible hand cannot be anticipated by any one individual or organisation, your own plan will necessarily be less complicated and less responsive to people’s desires.
As for the externalities, yes, there is a role for government in creating property rights, New Zealand’s fisheries are a good example. That’s completely different to the topic of this thread though.
Governments also kill (1)
References:
(1) Stalin, J; Hitler, A; Tse-Tung, M; Pot, P et al: (1900-2000) ’20th Century: One monumental fuck up caused primarily by excessive government power”
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DS
Glad you understand that the market has no ability to plan.
However, to assert as you do that it is the sum of many people’s PLANS is unsupportable. It has nothing to do with planning. It deals only with the present tense. It responds on the instant to the perception of the current risk and reward environment.
It is subject to errors of enormous consequence as a result.
===============
On the subject of governments… your willingness to cherry-pick the least representative dictatorships in history for your examples is risible.
Representative government may also kill but it is unusual and the government is answerable for its actions… quite different from the impersonal way the invisible hand crushes the life from the unfortunate.
The topic isn’t esoteric… it is economic… and economics is a part of ecology., not the other way around.
BJ
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BJ-
The market does not plan for the future but people do, and the market is the sum of those plans. Therefore it contains a wealth of knowledge about the future. Of course to define an ‘error of enormous consequence’ you would have to have a concept of how things ‘should be’ for everyone, all the time, but that is quite beyond the limits of any one person’s knowledge. Hayek’s Use of Knowledge in Society is a devastating essay to that effect that you can find on Google.
Yes I used the most extreme examples of last century, but the point is that governments, killed a lot more people than markets last century in response to your open-ended point 3) above.
I now see that you really meant some sort of metaphorical ‘crushing of life’ and contend that governments are a lot less likely to do this crushing because they are ‘representative.’ If you haven’t read it then Bryan Caplan’s Myth of the Rational Voter is a great exposition of why governments aren’t actually that representative. So is David Friedman’s Private and Political Markets both Fail which can be found on the Business Roundtable website under network industries.
The basic thesis is that politicians and government are subject to the same ‘shortcomings’ as the market, they just have a lot more institutional constraints.
As for economics being part of ecology, well if you like to order your understanding of the world that way that is your choice but can I suggest they are both a lot more useful when seen as equally valid ways of analysing situations with much to offer each other, much like maths and physics.
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“Of course the invisible hand does not have eyes or a brain. It is the result of many people’s (people who all have brains and eyes) collaborative voluntary action”
How are people’s market choices ‘collaborative’? Much of the problem is that market choices are not collaborative and the sum of individual decisions has consequences that individuals don’t intend. So if I choose to buy cheaper Chinese made clothing, fine. If a whole bunch of people do the same, my neighbour loses her job in the local clothing factory. Then we all have to stump up to pay her dole. Maybe she finds another job, say in tourism, but it’s seasonal, she can’t meet her mortgage payments loses the housde, gets depressed and the rest of us pay her medical bills etc. etc.
The story could go all sorts of other ways, but point is that nobody decided to put her out of work, or have her lose her house, these were unintended consequences of buying cheaper goods. In a free market there are all sorts of unintended consequnces of individual decisions, which the decision makers are not accountable for. Free market decisions are inherently irresponsible, which is where socialism in its many forms comes in. We all have to think about society and what impact of our choices will lead to.
Speaking of metaphors. when Adam Smith came up with ‘the invisible hand’ he wasn’t talking about the market, but technology. He noted that globalisation wouldn’t happen because the cost of transport and poor communications would make producing local goods and investing locally better options than investing overseas where labour was cheaper.
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Sam-
You set up as many anecdotes as you like but that doesn’t change the fact that political institutions are inherently less able that markets to respond to changing preferences.
As is the topic of this thread, they certainly don’t have the ability to maximise welfare by specifying import levels.
Also, the plural of anecdote is not data.
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“political institutions are inherently less able that markets to respond to changing preferences.”
Agreed, but that isn’t the issue, is it? My theoretical illustration (it was a story, not an anecdote) was to point out that a whole bunch of individual choices will have consequences that aren’t obvious to the individual making the choice (since it depends on what everybody else does). If we all make decisions on what suits us as individuals, we’ll end up living in a miserable society.
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The market is the sum of people’s plans?
I still fail to see this. It is the sum of the transactions of individuals… it may reflect their plans in some degree, but it is a real time reflection of transactions, not of wishes, aspirations or “plans”. If everyone on average is more likely to be right than Warren Buffett then maybe you have a point. The market as a whole is incapable of finding its own a~se 6 WEEKS in the future with differential GPS, radar guidance and triangulating beacons. That also applies to most business projections that go more than two quarters into the future. They beat most individuals and “the market”… but they aren’t all that good at foresight either.
As to the definition of ‘enormous consequences’ I regard the loss of our civilized society as we currently enjoy it as ‘enormous’ and so set the bar a bit higher than the question of whether a given foreign trade policy is going to be fair to individuals. We may be arguing around two very different levels… and I suspect that is part of the reason we ARE arguing.
I am more concerned that the market has NO price signal on any part of the commons yet. More concerned that it cannot react properly to the damage it is doing 30 and 50 years in the future. That is something the market is not doing well with and is the reason I butted in here. I don’t think you were arguing about that. I don’t think I was really arguing about what you were concerned with. It just looked that way a while. Maybe this next will set us back to a more reasoned debate:
*
To be sure I prefer to protect our citizens from some of the damaging impacts of globalization… but it is a lot like thermodynamics. You can put in all the insulation you like between the hot body and the cold body. The heat will eventually get through or around that insulation and the temperatures will eventually equalize. The same goes for wages and productive labour. Globalization has to result in a decrease in the living standards of those currently at the top of the food chain… protectionism is like insulation… but as you observe, this is incomplete. There are benefits to allowing cheaper goods to be sold here.
There are benefits to allowing a race-to-the-bottom for wages of individuals… but there are limits to those benefits and exceeding the limits causes grief as well.
We are far too smart and we are far too productive as individuals now to be able to balance production and consumption as we used to do, with nothing but growth.
We can’t make a living selling each other hamburgers either.
Later
BJ
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“Representative government may also kill but it is unusual and the government is answerable for its actions…”
It’s neither unusual nor answerable. Was the government castigated or sacked when the road toll got stuck at 400 or when the government proposed taking 30 years to halve the road toll? Of course not. Although the National Road Safety Committee’s year 2000 report on how to halve the road toll by 2010 is still available at the Ministry of Transport’s website it might as well have never existed as far as the public consciousness is concerned or as far as our press release = news item journalistic investigations is concerned. So as long as nobody remembers that the government was told precisely what it had to do to save 200 lives a year it chose not to do those things because they weren’t voter friendly. Representative government is no better than big business. Where big biz will always choose saving money ahead of saving lives (remember the Pinto and it’s infamous cost/benefit analysis?) politians will always choose saving votes ahead of saving lives. That is what this government did, deliberately and wilfully, knowing full well that it’s public consultation on the road safety strategy had given it a mandate to do so, and in the process had made the public complicit it the crime against humanity, thus granting the government effective imunity from prosecution. Different from the Nazis solely in the numbers slaughtered.
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Or perhaps – different from Tranzrail only in the numbers killed and crippled.
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-ds
but that’s exactly what these trade deals do. individual trade deals is not the same thing as free trade – especially as they are never a simple matter of creating a single market for the two economies, but rather a mess of complex details.
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