"With one swing of the axe yesterday, the government knocked the last prop out from under the automotive assembly industry. A speedy end to tariff protection will render uneconomic any local manufacture. ... In theory, the end of car assembly need not kill off the manufacture of car parts. Nimble producers could sell to assembly plants abroad, but the hurdles are high. ... It would be logical for parts producers to move their operations close to their customers. The Victoria state government, for example, might offer a New Zealand parts maker incentives to move its operations near to Melbourne's Toyota plant."
"My support for Toyota, and for the tariff regime that makes it possible for them to stay, is entirely consistent with [my opposition to the MAI], as the motor assembly industry is an integral part of NZ's industrial and skills infrastructure, contributes substantially to the national and regional economy, and is generally a good employer. The government which wants to sign the MAI and tie the hands of future governments is the same one that wants to phase out tariffs so fast that it closes the motor assembly industry."
In November (Jenny Shipley: Prime Minister, Centrist, Neoconservative) I suggested that a Shipley-led Government might slow down
rather than accelerate New Zealand's unilateral quest for pure
free trade and support for international freedom of investment.
Last week's announcement that motor vehicle tariffs will be eliminated
by the end of 2000 suggests that I am wrong.
In my defence, I should note that my article was more than a set
of predictions; it was about what I think Shipley must do if she
wants to win the 1999 election. She will need to stamp a leadership
style based on neoconservative social policy rather than neoliberal
economics.
I hesitate to withdraw my prediction, just yet. After all, Roger
Douglas's pronouncements 10 years ago were not wholeheartedly
endorsed by the then Prime Minister. It seems to me that this
month's lurches to the right represent the fruition of work undertaken
throughout 1997 by John Luxton and Max Bradford in particular.
Certainly, it would hardly be possible to lurch further than to
the right on the Multilateral Investment negotiations than we
have in the Bolger era (see Gordon Campbell's "Investor Rules,
OK?", NZ Listener, 27 December 1997). There is plenty
of scope for Shipley to add to her voter appeal in 1998 and 1999
by moving away from the extreme neoliberal posturing of Luxton,
Bradford, and Lockwood Smith.
The cosmopolitan argument for free trade states that all countries
will be better off if trade itself is not taxed; that is, prices
of goods will be lower in the general absence of import tariffs,
creating a general increase in real incomes. The argument claims
that taxes on trade lead workers in all countries to produce importables
whereas they could be more profitably employed doing something
else. It is an argument that assumes the world economy is characterised
by full employment. The reality is, of course, that full employment
does not prevail. Therefore workers who cease to produce importables
such as cars, are more likely to become unemployed than to switch
to something that pays them higher market wages.
Unemployment rates are lower in a world in which all countries
impose moderate taxes on trade, than in a world free of such taxes.
This is because of the reduction of risk implicit in a multilateral
system in which local producers have a small advantage over transnational
producers. Risk management is an important task of government.
Even Lockwood Smith acknowledges that there are advantages in
a "stable" and "certain" trading environment
(Campbell, ibid.). Furthermore a multilateral environment
of moderate tariffs (ie taxes on imports set in the 1530%
range) creates the breathing space that encourages firms to incur
the cost of training their own workers rather than seeking to
poach workers trained elsewhere. As Jeanette Fitzsimons notes,
there are important training and human development advantages
in a protected environment, leading to less structural unemployment,
the bane of the 1990s.
Regional subsidies - in addition to tariffs - can create the kind
of environment in which firms are most likely to locate where
supplies of labour and urban infrastructure already exist. An
efficient economy is one in which economic activity locates near
to where people live and wish to live. On the other hand, an economic
system that requires people to move to the largest cities to gain
employment is a very wasteful system.
The nationalistic argument for free trade - the argument that
our government is pushing on our behalf despite lipservice
to exportled growth - states that it is good for us to remove
all our import taxes and export subsidies, even if other nations
don't. The idea is that a country should seek to maximise its
imports, not its exports; if other counties want to export more
and import less, then we should just say "thankyou"
and import the goods they make for us. This is a view propagated
only by economists, and it differs sharply from the standard (mercantilist)
view of business persons and politicians that exports should be
maximised and imports minimised. Under the economists' nationalist
argument, it is better for us if we buy subsidised cars assembled
in Australia than cars assembled at lower factor cost in New Zealand.
Economists will concede, however, that the allocation of industry
between Australia and New Zealand would be more efficient if both
countries gave their industries moderate support, than if one
country protected and subsidised its industries while the other
did not.
Nationalistic free trade policies, such as ours, fail to deliver
global efficiency and they cause massive balance of payments'
problems to the countries which pursue them. The economic argument
assumes that, if we consume more and produce less, then every
other country will want to copy us, thereby creating the
best of all possible worlds despite mutual national greed. The
problem here is (i) that other countries don't want to copy us,
and (ii) that the best of all possible worlds is one in which
each country gives some (but not too much) protection to its own.
Other countries don't copy us because our policy leads to low
export receipts, low wages, low taxes, diminished demand for goods
and services, and therefore less rather than more imports. Reducing
the prices of our imports doesn't necessarily mean that we can
afford to have more of them.
One important cost of tariff removal is a loss of public revenue.
Tariff removal is a tax cut as well as a means to pure free trade.
Unless other taxes are raised to offset this effect, the tax cut
may bring about a misallocation of resources. If collectively
consumed public goods are already being supplied in quantities
well below the quantities demanded - as they are in New Zealand
today - then a further reduction in the supply of such goods (eg
health care, education) constitutes a greater misallocation of
resources.
There are a number of other issues. For example, it is not clear
that we will be better off if our new cars are cheaper. (It is
not even certain that our cars will be cheaper, as car importers
may be able to benefit by raising profits - in effect through
pocketing the tariff rather than passing it on to the government's
consolidated account. It is certainly not clear that there will
be more competition in the car retailing industry in the 2000s.)
At the Kyoto environmental conference this month (see Hara-Kiri in Kyoto?), a sincere attempt was made to set an international
protocol to reduce car exhaust emissions. Reducing the cost of
motoring, as we are seeking to do, is hardly a step that facilitates
any commitment that we have made to raise the private costs of
motoring sufficiently to cover the social costs. Tariffs on cars
do go part of the way to limiting car-sourced air pollution.
The most important cost in motoring - so the AA keep telling us
- is depreciation. Lower newer car prices lead to lower used car
prices. Thus there is a considerable cost imposed on existing
car owners by the removal of tariffs; a reduction in the value
of their assets, sometimes pushing car "owners" into
negative equity. Furthermore, the true effect on inflation of
reductions in new car prices is quite small, because the cost
of trading an older car for a newer one does not change as the
result of the tariff cut. For most people, it is the trade-in
price that matters, not the full price of the new car.
Tariffs have the advantage of being an overt form of protection,
a source of public revenue, and a means of preempting the
other forms of protection that can lead to ridiculous stand-offs
between nations, such as that at present going on between Australia
and New Zealand over fire blight in apple trees.
The loss of economic activity in New Zealand goes far beyond the
car assembly industry itself. The local industries that supply
components to the assembly industry already earn significant export
revenue. It is very hard, however, for a local industry to succeed
without a complementary local market to provide some stability.
These activities are likely to drift away from New Zealand, and
will be eventually replaced by servicesector activities
in the bigger cities that add less value to the New Zealand economy,
and have fewer linkages into other sectors of the local economy.
In the medium term, New Zealand appears to be among the first
countries seeking to truly embrace the transnational economy;
an economy which means far more than multinationals such as Toyota
operating regional production sites in places like Thames. A large
and increasing proportion of international trade is now conducted
between differently located branches of companies. Head offices
not only play states off against states; they play their own subsidiaries
off against each other. As Rod Oram noted:
The best recipe for a cosmopolitan multilateral world economy
is trade freedom but not free trade. All countries should maintain
moderate tariffs on all importable products. In that way the nations
themselves - by each tilting their environments in favour of their
own producers - provide stability, security, and sovereignty de
jure. When all countries have the same tariffs, there is virtually
no misallocation of resources. New Zealand's policy serves to
generate unemployment while encouraging manufactured imports from
a country, Australia, that continues to favour its own producers.
{ This document is: http://www.oocities.org/Athens/Delphi/3142/krf41-car_tariff.html
{ It is also usually available at: http://homepages.ihug.co.nz/~peter/KRankin/.RankinFiles/rf41-car_tariff.html
{ the above references are to: http://www.oocities.org/Athens/Delphi/3142/krf24-shipley.html
and:
http://www.oocities.org/Athens/Delphi/3142/krf38-kyotoCO2.html
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