Thursday, March 16, 2006

Alfred Oehlers: Twin-pronged solution to our trade deficit problem

Efforts to encourage consumers to buy New Zealand-made have been around for at least 20 years. Business New Zealand has been the main organisation that has led such campaigns, but the Green Party and the Employers and Manufacturers Association have also got into the act.

This latest effort spearheaded by the Greens coincides with bad news for the economy. In this context, the revival of the Buy Kiwi Made campaign might be judged timely.

By encouraging consumers to buy locally made products, support is provided to local producers and jobs protected. If more local products are bought and fewer are imported, the trade deficit may be reduced.

On the surface, all this sounds fine. So, as patriotic New Zealanders should we rush out and fill our shopping trolleys with locally made products?

To answer this question we need to move away from mere political posturing, rhetoric and jingoism, to have a sober look at the causes of the problems confronting the New Zealand economy.

Let's take business closures and the resulting loss in jobs. Anyone following the news will know these businesses are not closing because there is no demand for their products. On the contrary, the demand is there, but they are finding it impossible to continue operations because of the uncompetitive cost structure of the country.

Switching consumer spending to these companies through a Buy Kiwi Made campaign is not a lasting solution.

To help these companies and save the jobs there is a need to address more fundamental issues affecting their competitiveness. These might include exchange rates, interest rates, compliance costs and so on.

Let's take a look at the trade deficit. Suggesting that the deficit can be reduced by switching consumer spending to locally produced products is perhaps simplistic.

Such an argument assumes that New Zealand-made products and imported goods are perfect substitutes, so we can switch easily. But the fundamental principle of international trade is that as a country we exchange what we have (exports) for things that we don't (imports). The reality of the situation might be that there are just no locally produced substitutes for the things we are currently importing.

Viewed this way, there might be another, deeper reason why the trade deficit is growing. As the New Zealand economy has grown and matured in the past 20 years or so, consumers may simultaneously have been changing their spending habits and consumption patterns.

Under the impact of liberalisation within the domestic economy, plus globalisation more widely, consumption patterns may have become more cosmopolitan, sophisticated or worldly. At the same time, however, the productive structure of the economy may not have evolved to a similar extent.

With some exceptions, the structure and composition of manufacturing has not changed much during the past 20 years. Unable to find the sorts of things they want to buy being produced here, consumers have looked towards imports which have grown as a consequence, leading to a chronic trade deficit that has widened over time.

If such deeper structural issues are behind the trade deficit, then buying New Zealand-made will likely only have marginal impact. There might be some benefits, but only to the extent there are locally produced equivalents to current imports. If there are none, the imports will still flood in.

To address the deficit, it might be more fruitful to encourage New Zealand businesses to switch into things that consumers want to buy, but which are being imported.

The term "import-substitution" springs to mind. This might draw flak from some quarters, warning of protectionism, rent-seeking and other economic inefficiencies normally associated with such policies. But there are other ways of engaging imaginatively in import-substitution without resorting to failed policies such as protectionism.

Well-targeted and designed industry policies, for example, coupled with skills and workforce training, have been shown to work in other OECD and Asian nations, while all remaining consistent with an open trading environment under WTO principles.

Surely with such positive examples available we should investigate the options.

Admittedly, it will still be difficult to achieve headway with such efforts, as competition in any market segment is likely to be stiff. But that brings us to a point raised before, that probably the fundamental issue at stake is the competitive structure of the economy, and not whether as New Zealanders we are supporting local businesses.

Until and unless competitiveness is addressed, the root causes of our economic problems are unlikely to be resolved. Deal with competitiveness and you will not only revive an import-competing sector but strengthen exports as well, thereby providing a twin-pronged solution to the trade deficit.

As an appeal to our nationalistic impulses, and perhaps as a marketing tool, buying Kiwi-made is okay. But let's be realistic about what such a campaign can achieve.

In terms of the problems besetting the economy, it at best can only have a marginal impact. At worst, it will distract us from deeper issues and provide an excuse for avoiding hard policy decisions.

* Alfred Oehlers is Associate Professor of Economics, Faculty of Business, Auckland University of Technology.

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