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Past, Present and Future Developments in New Zealand's Terms of Trade - WP 06/09

4.2  Compositional change in New Zealand’s goods imports

New Zealand’s imports composition has also changed in the last two decades. New Zealand is moving more towards importation of manufactured goods from “low-cost” countries such as China and the ASEAN (Association of South-East Asian Nations) countries and away from “high-cost” countries such as the US and Japan. Figure 12 below shows how imports from China have gone from less than 1% of total good imports in 1983 to over 10% in 2005. The fact that there has been an increase in the proportion of imports that New Zealand sources from the low-cost Asian countries has allowed it to keep its imported manufactured prices low relative to world manufactured prices, as shown in Figure 5.

Figure 12 – Source of New Zealand’s Good Imports
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Source: Statistics New Zealand

4.3  Endogenous nature of New Zealand’s terms of trade[19]

The upward trend in New Zealand’s terms of trade over the past three decades is influenced by compositional change in its exports and imports. Improved institutions that allow economic agents to respond more freely to market price signals may mean that relative price movements can now play a more important role in the allocation of resources within the economy than occurred in the past. This would result in New Zealand’s terms of trade becoming more endogenous in the sense that it is influenced by decisions made within the New Zealand economy and not just the exogenous fortunes of international markets. Take for example export prices: if more resources are moved to producing an exported good that has a relatively higher price, then this in turn will lead to higher terms of trade as the good with the higher price will receive a greater weighting in the total bundle of New Zealand’s goods exports.

The terms of trade may be becoming more endogenous as the institutions within New Zealand become more adaptive to relative price movements. The fact that the volatility in these price movements has also reduced will add in this shifting of resources as it lowers the risks of new investment decisions.

4.4  The impact of China

One factor that is having a significant impact on the relative prices of internationally traded goods is the growing influence of China. Between 1974 and 2004, China’s GDP (measured in 1990 US dollars) has grown considerably faster than any other regional group of countries (8.3% compared with the world average of 3.0%). The composition of China’s growth has also changed over this period. The source of China’s production has moved from domestically-oriented activities to an increasing proportion of outward-oriented activities. While this theme is not uncommon and has been experienced by other Asian outward-orientated countries such as Hong Kong, Korea, Taiwan and Singapore, the size of the Chinese economy as well as its huge population base may lead to a different impact on the rest of the world (Kaplinsky, 2005).

This increasingly outward-orientated activity by China is reflected in its increasing share of imports into New Zealand. Between 1983 and 2005, its share of New Zealand’s total goods imports increased from less than 1% to over 10% (Figure 12). A similar situation has been experienced by other countries. For example, Chinese imports (mainly manufactured) into the US between 1980 and 2002 increased from close to zero to 14% of total goods imports (Kaplinsky, 2005).

China’s momentous growth over the last 20 years has seen its demand for commodities increase significantly. Not only are these commodities needed as inputs into the production of consumption goods for its huge population and for significant infrastructure projects, but many of the hard commodities are used as inputs into the production of China’s manufactured exports. The increases in these hard commodity prices are driven by the same broad demand side factors that have led to the increases seen in some soft commodity prices recently e.g. New Zealand dairy and meat export prices.

Notes

  • [19]I thank Bob Buckle for bringing this to my attention.
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