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.