COMMENT: If a tree falls in the forest
Wednesday 22 Apr 2020
Even if you don’t really care much about forestry, the Government’s response here may signal what’s in store for the rest of the economy after lockdown. Will New Zealand continue as a trading nation and open economy, building on the recent success in setting a free trade agenda in essential goods with Singapore? Or, will it retreat to a more Muldoonist policy in which people like Minister Jones decide what can be exported?
BusinessDesk last week reported that Minister Jones is considering levies on log exports to fund some kind of “re-setting” of local industry, or a variety of regulations to ensure domestic lumber processors have their needs met before logs are exported.
The story noted how local lumber processors are struggling to compete with processors elsewhere when international prices for logs are high. Minister Jones viewed protections were necessary to ensure a viable domestic log processing sector in New Zealand. But it’s worth explicitly stating what that means. Minister Jones would effectively be setting a price cap on logs, restricting exports whenever international demand is high. This would be a transfer of money from timber farms, which would otherwise profit from higher prices, to sawmills.
It would also mean a substantial shift in New Zealand trade policy. If another country banned the export of raw materials to New Zealand to subsidise its own processors, New Zealand’s processors might see that as basis for a complaint about unfair trade practices. New Zealand’s trade negotiators can boast about New Zealand’s clean record in following trade rules. If Minister Jones has his way, those negotiators will have New Zealand’s trade restrictions in lumber thrown at them any time they object to trade practices which disadvantage Kiwi companies.
So it is misguided on pragmatic grounds that it will disadvantage New Zealand as the world leans toward greater protectionism – New Zealand has more to lose than most from a weakened rule-based international trading system. Wellington should be working to support that system rather than help tear it down.
But it is also misguided in principle, falling afoul of what Canadian economist Trevor Tombe called the “value-added mythology”. See the following story.
While some business commentators will argue that New Zealand firms must ‘move up the value chain’, international prices really do reveal important information. If giant, efficient sawmills abroad can process logs far more cheaply than domestic mills, even taking shipping costs into account, then forcing logs to stay here for processing isn’t value- creating – it’s value-destroying.
Putting it another way: forcing that processing to happen here, when it is more efficiently done abroad, means we can afford fewer houses.
Canada, where comparative advantages often lie in raw material production rather than processing, has long had similar debates – particularly about oil processing. As Canadian columnist Andrew Coyne asked in that context, “which offers the better returns: to sell crude whatsit for $6 that costs you $2 to produce, or to ‘move up the value-added chain’ and sell refined whatsit for $8 that cost you $6? And who better to make these comparisons than the people whose money is actually at risk? Refining bitumen is an expensive, capital-intensive business. If it were really wiser to refine it here than to sell it to refiners elsewhere, investors are at least as capable of realising it as anyone else.” We might remember that the same kind of value-added magical thinking led to New Zealand attempts at domestic car and television manufacturing industries prior to the reforms of the 1980s. Neither made much sense in a country where the most efficient way to get cars and televisions is to buy them from places better at making them, paid for by selling them our milk, meat and fibre.
This leads to perhaps the worst aspect of Minister Jones’s proposal.
It does not just mess up New Zealand’s international trading position. It also sets a stage for a domestic economic recovery in which too much would require the permission of the Ministries. Export logs? Only if the Minister’s current political priorities have been satisfied and the exporter has received a permit. Maybe a donation to the appropriate foundation might ease the process?
Which other sectors might be next in line for this kind of central industrial planning? New Zealand simply cannot afford this kind of nonsense. The epidemic already brings enough uncertainty about supply chains, shipping, workforce, logistics and demand. Government should not add a risk that it will decide that your company’s sector will be stomped upon for the benefit of other sectors preferred by Minister Jones or his colleagues.
Cabinet this week will weigh Minister Jones’s logging proposals. Its decision may signal how the government intends on proceeding more broadly. We should all be paying attention.
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