12 October 2013

Importers Profit From Exchange Rate?

When the NZ dollar goes up a notch, two things happen: (1) some exporters complain and (2) importers are accused of profiteering. That is understandable, as a higher dollar makes exports more expensive and imports cheaper. Understandable, but not necessarily right. Importers who see their costs reduced when the currency goes up, would love to increase their profits by keeping their prices at the same level. In that respect, they are no different from school teachers, firemen, stevedores and all the other folk who would like to have higher incomes. The problem is that, when their costs go down, so do their competitors’. If they fail to meet the competition’s price reductions, they lose sales, pure and simple. So, when their costs go down, so do their prices, much as they would love them to stay the same. The final consumer is the winner, both directly in the form of lower prices and indirectly in the form of lower inflation. Without the downwards pressure of import prices, the Reserve Bank would have to increase interest rates.

Things are not that simple either, when it comes to exports. Many exporters of manufactured goods import components and raw materials denominated in US dollars but export most of their wares to Australia. When the NZ dollar rises against the US dollar but stays down against the Australian dollar (as happened in recent times), those manufacturers get a double dose of good news: their inputs are cheaper and their finished products remain competitive in the Australian market. Other exporters, such as primary producers, are not so fortunate, as they have a relatively lower level of imported inputs and sell their produce in US dollar markets.

International traders, be they importers, exporters or both, operate in a regime of perennial volatility. In a small country like New Zealand, the currency bobs up and down like a cork in the ocean. It is little more than a waste of effort to complain. It is an even bigger waste of time to pretend that a country like New Zealand can do anything useful about the value of its currency. To attempt to do so would be much like trying to soak up the incoming tide with a beach towel.

Every time some wise guy intones gravely “the New Zealand dollar is over-valued”, we wonder where that superior wisdom comes from. The dollar is always valued at the exact amount that someone is prepared to pay for it, from one minute to the next. No country has ever devalued its currency to prosperity, otherwise Zimbabwe would be richer than Switzerland. When people clamour for a lower dollar, they are in effect asking for a reduction in other people’s salaries, as most of what we consume in New Zealand is imported.

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