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Future outlook

Agriculture is likely to be an ongoing area of comparative advantage. Global trends in population growth and water scarcity suggest that demand for agricultural production is likely to increase in the medium term. One study finds that New Zealand is expected to gain more than other developed countries from the expected expansion in China and India.[87] The implication is that domestic policy settings that influence the growth prospects of the agricultural sector are important for New Zealand's future international competitiveness.

50%
Proportion of world trade that will be in services by 2020
Source: World Trade Organisation

The importance of services is likely to increase. The WTO estimates that 50% of world trade will be in services by 2020, through cross-border trade (e.g. an architect working for a foreign client), consumption abroad (e.g. international students), a commercial presence abroad (e.g. a foreign bank opening a domestic branch), or the movement of people (e.g. a visiting foreign academic). Given that barriers to services trade come almost exclusively from domestic regulation, it puts increased weight on the domestic regulatory environment and international approaches to reduce behind-the-border barriers in other countries (e.g. APEC). International telecommunication costs are also relatively more important for services, putting emphasis on the cost, speed, and availability of broadband.[88]

‘Trade in tasks' is likely to continue. As discussed earlier (page 6), the shift in the past decade towards breaking up the value chain is likely to be sustained, driven by technological progress lowering the cost. New Zealand’s industry structure (i.e. primary sector dominance) potentially allows for less fragmentation of the supply chain than in other countries, and there is perhaps an open question about the extent to which this matters. It is also interesting to consider what factors might actually reverse the current trend. Technology is lowering the cost of separating tasks, but perhaps increased information costs may provide a limit.

General policy lessons

Policies that can be made unilaterally

Encourage imports through low barriers. Imports are an important source of competition and foreign knowledge. At-border barriers such as tariffs, customs and port procedures should kept as low as possible.

Lift firm productivity generally to encourage exports. Given the causal link runs most strongly from productivity to exports, improving firm productivity generally is likely to be the strongest driver of better export performance.

Reduce specific barriers to firm internationalisation. Some barriers exist that affect exporters specifically rather than the domestic economy:

  • Ensure international transport and communication links are as low cost as possible, through a mix of regulatory and competition settings, ownership settings, and government provision. Policy areas to pay particular attention to are shipping and sea ports, aviation and airports, customs facilitation, and telecommunications such as broadband,
  • Dampen large medium-term exchange rate cycles. The tools to reduce exchange rate cycles all have trade-offs. The best response is to reduce the risk of pro-cyclical fiscal policy and to maintain a sustainable, predictable and smooth medium-term adjustment path.
  • Help reduce informational costs, through an offshore network of posts that provide in-market support and knowledge, limited government grants for market development (with a focus on ‘new' activities, and in line with international obligations), and skills and training with a recognition of the challenges in internationalising from an early stage in a firm's life cycle.
  • Provide limited assistance in access to credit, through guarantees when entering markets with political risk, and working capital for expansions (in line with international obligations).
  • Design domestic policies with the Asia-Pacific firmly in mind. Domestic policies that are more similar to those in other countries will reduce transaction and information costs to doing business outward and inward. Regulatory harmonisation, adoption of international standards, and so on, should be consistently considered, although harmonisation might not always be best. In particular, ongoing moves toward creating a single economic market with Australia should be continued.
  • Reduce barriers to the development of future comparative advantage. In agriculture, for example, effective management of natural resources (specifically greenhouse gas emissions and water) will be necessary to allow sustainable future growth.
  • Support flexible adjustment in the economy, through a social safety net and opportunities for workers to re-skill as resource allocation in the economy shifts over time.

Policies that require international engagement and agreement

  • Improve market access for New Zealand firms, through a mix of strong support for the multilateral WTO process, an active plurilateral and bilateral trade agenda, and proactive engagement in the emerging Asia-Pacific regional economic architecture.
  • Negotiate to assist development of future comparative advantage. A fair post-Kyoto framework would have wide inclusion of countries and gases, with more recognition of the relative inability to reduce emissions in agriculture in particular.
  • Work towards regulatory compatibility and international standards. Behind-the-border barriers from non-harmonised regulatory regimes impose additional costs, so New Zealand can work towards regulatory harmonisation and international adoption of agreed standards. In some areas, New Zealand may have an interest in helping develop standards.
  • Be prepared to counter negative perceptions. Influencing perception of New Zealand products abroad could reduce the threat of protectionist backlashes and positively influence views about New Zealand products. Countering claims about ‘food miles' could be one example.
Table 2 – Summary of the different types of trade costs
Type Component Description
Geographic International freight Air/sea transport (financial and time).
Logistics and distribution Domestic freight logistics and retail/wholesale distribution (financial and time).
Communication Telecommunications and face-to-face contact.
Administrative Border costs Customs, air/sea ports (financial and time).  Tariffs.
Foreign currency Hedging short-term exchange rate volatility. Generally higher costs from medium-term exchange rate cycles. Broad transaction costs from different currency (changing foreign exchange, changing prices, etc.).
Cultural Language Communicating in a foreign language.
Unfamiliarity Unfamiliarity with cultural norms or business norms.
Preferences Biases or preferences of foreign customers to do business with firms in their own country.
Information Market knowledge Information about the market, the relevant contacts, the networks and relationships necessary to doing business, the prospective customers or business partners, etc.
Institutional settings Understanding the host country legal, financial, and tax regulations and standards.
Table 3 – Indicators of ease of trading across borders: comparison with other countries.
Index Ranking Criteria
World Bank: World Trade Indicators 17th/125 countries (2008) Average applied tariff level
World Bank: Ease of Trading Across Borders 23rd/ 181 countries (2009) Cost, time and number of documents necessary to import/export goods
World Bank: Logistics Performance Index 19th/ 150 countries (2008) Survey data about perceptions of factors such as the quality of customs and border procedures, transportation and IT infrastructure.
World Economic Forum: Global Enabling Trade Report 10th/ 118 countries (2008) Measures facilitating trade, including market access, border administration, transport and communications infrastructure, and the business environment
OECD: Total trade barriers

18th/ 26 countries (2004 and 2006)

3rd /26 countries (tariff level) (2006)

21st/ 26 countries (non-tariff barriers) (2004)

Average tariff and non-tariff barriers, including customs procedures and technical requirements

Notes

  • [87]Dimaranan et al (2007)
  • [88]Skilling and Boven (2007) discussed developing the ‘weightless’ economy and emphasised the importance of telecommunications infrastructure.
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