22 November 2009

Mercantilism is not Free Trade

The Government decided to break a promise made under APEC to have free trade by 2010. Tariffs will remain frozen for another five years. This decision was made against advice from Treasury.

Why? In a word, Mercantilism. This is a discredited economic theory that holds that exports are good, imports bad. It is much beloved of bureaucrats who make a handsome living 'negotiating' with each other at plush venues all around the world. One such professional trade negotiator, Tim Groser, is now our Minister of Trade Negotiations.

The evidence that the current tariffs of 10% on clothing and shoes serve no useful purpose is compelling. There is not a single company that decided to manufacture in New Zealand because of those tariffs - they are just too low for that. All that they achieve is to make clothing and shoes, which are practically all imported, more expensive for consumers. And yes, they do keep a few bureaucrats employed, like Customs officials - and trade negotiators.

The Treasury had a look at the issue from a national interest perspective and recommended against the freeze. Customs, MAF, the Ministry of Economic Development and Foreign Affairs had a look at it from a self-interest perspective and recommended a freeze. Trade bureaucrat turned minister Tim Groser went with his former colleagues.

A survey on globalisation published in the Economist in 2003 (www.economist.com) said, "The multilateral approach to trade liberalisation [...] does have a horrible flaw. It espouses the idea that lowering trade barriers is a concession you make to your trading partners; a sacrifice for which you require compensation, or "reciprocity", in the jargon. This mercantilist view of trade - exports are good, imports are bad - is an economic fallacy. Politically - and this is to endorse a point made by sceptics - it serves to enthrone producer interests, neglecting all others. Trade agreements go forward when exporters on all sides tell their governments that they see something in it for them; the interests of importers (that is, workers and consumers at large) are implicitly regarded as politically insignificant."

Minister Groser decided to keep imposing tariffs on New Zealand consumers in the face of evidence that they serve no useful purpose, so he can use them as bargaining chips in future negotiations. As if other countries cared. China signed a free trade agreement with New Zealand for purely political reasons, not because it wants to push its market share of imported clothes beyond 100%.

This degree of economic myopia is excusable in bureaucrats, but very inexcusable in a Minister. After nine years of economic lunacy and empty promises (remember carbon neutrality in our time?), we expected much, much better from this government.

It was interesting to read the cabinet papers prepared by officials and published in www.med.govt.nz. Every passage that referred to the only possible reason for retaining tariffs - as bargaining chips in future trade negotiations - was carefully censored. Why the secrecy? The Economist had the answer in the same article: "Most governments insist that the grubby details of trade negotiations be kept secret; this is their idea, not the WTO's. At the end of any round of trade talks, a triumphant breakthrough backed by all sides can be announced. In the meantime, as you might expect, governments prefer to keep their negotiators' craven submission to corporate interests under wraps."

We need to eliminate our remaining tariffs, not because we want to do other countries any favours, but because that is in the national interest. This concept is not evident to economic simpletons, but we did not expect to have to spell it out to a Minister in a National government.

This is not an isolated instance. Prime Minister Key has said that an economy-destroying emissions trading scheme is necessary to prevent other countries from imposing trade barriers against us. The idea that we would face trade sanctions for failing to worship at the altar of Green religion is simple commercial naïveté. No country could impose sanctions, because no country (other than New Zealand) will actually inflict deliberate damage on its economy to appease the global warming Gods. They will just pretend to do so until the ideological assault from the Left abates in the face of science and the facts.

The Wall Street Journal got it in one when it said, "To the annals of global warming lunacy, add this gem from New Zealand: According to a parliamentary committee, Kiwis should accept lower standards of living to protect the national image abroad."

This is the sort of thing that can happen when bureaucrats become policy makers.

15 May 2009

Recession and Imports

The current global recession started as an old-fashioned bank run in the US. Confidence in the liquidity of the finance sector was quickly restored by the injection of gargantuan sums of taxpayers' money, coupled with government guarantees.

The incipient run was stopped in its tracks and, other things being equal, the speculative housing and commodity bubbles that were built during the cheap credit boom would have burst, as all speculative bubbles invariably do.

Unfortunately, left-wing politicians in the US, Australia and the UK saw this as too good an opportunity to miss. Here was an excellent crisis proving that the intellectual bankruptcy of their collectivist worldview was not buried in the rubble of the Berlin Wall in 1989, after all. No, we cannot just allow the markets to do what they do and allow the speculative bubbles to burst. Instead, we will regulate, regulate and regulate even more and then we will borrow a few trillion dollars from our children and grandchildren to 'stimulate' the economy. Those who advocate strangulation by red tape, quickly followed by stimulation with other people's money, do so with a straight face.

In New Zealand, we are fortunate in that the politicians currently in power appear to be marginally saner. Besides, we just do not have trillions to waste. All we can do is to hunker down and wait until it all blows over. There was a glimmer of hope when the Swine Flu briefly replaced the Global Financial Crisis as the panic du jour, but that scare fizzled out. Soon, we may have to go back to global warming alarmism, unless some other apocalyptic certainty takes its place.

Importers are among the first to feel the effects of recessions. This one, however, is a little different from those that we have experienced in the last two or three decades. If you are importing goods that rely on discretionary spending, you are probably taking a big hit right now, but if you import everyday items that people need, you would hardly have felt a ripple.

Because the current recession is largely driven by media sensationalism aggravated by political opportunism, people react in different ways. They defer purchases that are easy to defer, for example instead of changing their cars at the end of three years, they keep them running for another year or two. That is why the car business in New Zealand is in meltdown, along with its support services, like shipping and ports. On the other hand, The Warehouse discount retail chain has just reported an increase of 1% on sales (Red Sheds, same store sales) for the most recent quarter, compared to last year.

Importers of everyday items, like non-luxury clothing, footwear and food are reporting unchanged sales or small drops at the worst. If your washing machine breaks down, you will probably buy a replacement, but that big plasma screen that you have been thinking about will probably have to wait a while longer, especially as you can no longer get a cheap loan on the rising value of your house.

Importers are reacting to the current climate with caution. An increasing number of them are moving their own warehousing and distribution functions to third-party logistics operators, who can usually provide a better level of service at a fraction of the cost, if done properly. They are also attempting to reduce their level of debt, to protect themselves against the outrageous behaviour of our bankers, who have simply failed to pass on interest rate reductions to their business clients while enjoying a government guarantee on their deposits.

05 March 2009

Trans-Tasman Direct Flights?

The Prime Ministers of New Zealand and Australia announced an intention to turn trans-Tasman flights into domestic flights. This idea has been on the drawing board since 1992. We'll tell you why there has been no progress.

About five years ago, we published an item of Import News that read:

"My friend Pam is still fuming. On arrival at Auckland airport, she was greeted by a $200 fine, because her shoes had some dirt – from one of Melbourne's better golf courses. You see, Pam's golf shoes are a threat to our 'biosecurity'. She is not alone. Anyone who forgets to declare a kiwi fruit taken from the Koru lounge in Sydney will face the same penalty. Never mind that the fruit was most probably grown right here in New Zealand."

The traces of Melbourne soil in Pam's golf shoes are not a 'biosecurity' risk. The bureaucrats who fined her are not protecting anything, other than their own jobs.

The Prime Ministers are right. The only way to progress the domestic trans-Tasman initiative is to take it away from MAF. We have put up with their self-interested nonsense for far too long. Customs in both countries should accept an export declaration in one country as a provisional clearance into the other. It is perfectly possible to run a country without passenger departure cards. And you can't overcome 150 passengers and hijack a plane with nail scissors or tubes of toothpaste.

05 February 2009

Briefing to Incoming Ministers

The Importers Institute provides a briefing to new Ministers Maurice Williamson (Customs) and David Carter (Bisosecurity).

The good news is that you have inherited a top-notch Customs department. That is not just flannel produced by the department's PR, it is a fact established by reputable international surveys and it is also our observation. Customs protects the border and collects duties efficiently and with minimum disruption to trade.

The bad news is that the Ministry of Agriculture and Forestry (MAF) continues to encroach on the border protection work of Customs. Other agencies, like Immigration, are quite happy to delegate front-line duties to border protection professionals. But not MAF.

Have you noticed that, these days, after going through the Customs queue and waiting for your baggage to come out of the belt, you have to go through another lengthy queue? You hand out a form to a MAF official who then decides, based largely on intuition, whether or not to screen you. The people from Customs upstairs, whose job is to detect drug smugglers and illegal immigrants are apparently not to be trusted with figuring out whether you are likely to be trying to smuggle apples.

When MAF officials find bugs in containers, they promise to stop every shipment for the importer in question (or for other companies importing from the same supplier) for the next five shipments or the next twelve months, whichever occurs first. These stops are to be accompanied by charges of $100 an hour and the intention appears to be clearly punitive. Notice that they are not punishing an accredited operator for failing to detect risks and to alert MAF, they are punishing importers whose suppliers may not have done the right thing.

In reality, this is not going to work. They just don't have the manpower to inspect so many low-risk containers - a typical case of bureaucratic over-reach. Some importers will be put through a lot of inconvenience and expense and MAF will, no doubt, be asking you for more 'resources' (a.k.a. Money). This tactic seemed to work a treat with the last government: just have a look at MAF staffing levels in 1999 and in 2009. We suspect that you and your colleagues aren't quite so gullible.

Now, this has been going on for a very long time. About twenty years ago, Sir Geoffrey Palmer asked Gerald Hensley to look at border protection agencies and he recommended setting up a single agency. Ten years later, a National government asked Sir Ron Carter to do a similar review and his recommendation was essentially the same: form a single border protection agency.

The government changed before a decision was made and the new Labour ministers, Phillida Bunkle and Marian Hobbs, dismissed the recommendation on the grounds that Labour had promised the Greens that it would maintain a border agency dedicated to 'biosecurity'. The Ministers said that they would get Customs and MAF to work better together.

Ten years on, the departments have come up with a proposal for something called a "Trade Single Window". All they need is $120 million, more or less. We consider this proposal to be an answer in search of a question. You really should dust up the old reports. A single organisation will, of necessity, provide a single window. Customs use a modern relational database and we see no need to spend huge amounts of money on another big computer project.

There is also some unfinished business that you may want to turn your attention to: (1) a Law Commission report to do away with excessive departmental powers of seizure was dismissed by the previous government on spurious grounds; (2) Customs gave a monopoly to an outfit called ECN to clip the ticket on every import and export and, despite Ministerial promises to the contrary, this profitable contract was never put up for public tender; and (3) New Zealand importers still have to go through the absurdity of paying GST to Customs only to claim it back from the Inland Revenue a month or two later, while in Australia they are treated as a simple balancing debit and credit on the same statement.

The current recession means that you need to raise the bar on the quality of government's spending. Importers expect our border protection agencies to continue to improve services and reduce red tape. The only significant change in this area that the last government managed to make during the nine years that it was in power was the creation of an import transaction tax. We expect much better from you. Let us know if we can help.

01 January 2009

Failed Airline in Trouble Again

Air New Zealand is being prosecuted by the Commerce Commission for anti-competitive behaviour. The Commission alleges that the airline conspired with other airlines to fix prices.

Twelve other airlines that service New Zealand are also being prosecuted.

The action came as no surprise. Qantas paid a $75 million fine in the US and lifted its contingency provisions for any further fines from $57m to $135m. A Qantas executive went to jail in the US.

So, how much has Air New Zealand put aside? Air New Zealand chief executive Rob Fyfe said earlier this year, "We haven't set any figure aside at this stage, clearly there's an investigation going on - we have been named as a party of interest but there's nothing at this stage that allows us to identify a potential financial cost associated with that investigation."

Back in 2002, when the government decided to bail out the failed airline, we said, "Miss Clark and Dr Cullen have sent a message to the management of Air New Zealand: this airline will not be allowed to fail. Management is secure in the knowledge that there will always be another billion where the last one came from."