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5.3  Other issues

5.3.1  World trade reform

Other issues that have the potential to impact on New Zealand’s terms of trade include the progression of world trade liberalisation. Through protectionist policies and export subsidies, agricultural products are extensively supported by governments across the world. This protectionism distorts world trade and results in the oversupply of primary products on the world market, by lowering world prices.

A reduction in agricultural protectionist trade policies is one of the critical parts of the WTO’s Doha Development Agenda. Rae and Strutt (2004) model the potential impacts on New Zealand of a reduction in these policies in a Doha framework. They find that the welfare gain to New Zealand is relatively large and it is principally a result of a higher level of the terms of trade. Anderson and Martin (2005) also looked at the impacts of a successful Doha round and the impact on New Zealand (among other countries) and had similar conclusions to Rae and Strutt.

The Australian Bureau of Agricultural and Resource Economics (ABARE) have looked at a more generalised reduction in protectionist trade policies and the impact on the dairy industry. They measure the impact of a 100% increase in all tariff-quota volumes and a 50% reduction in all tariff rates. They find this has a large impact on the world price and on Australian and New Zealand production. They estimate price increases of 23.8%, 26.5% and 34.5% for skim-milk powder (SMP), cheese and butter respectively. In another simulation, they examine the impact on world dairy prices from a 50% reduction in subsidised exports in 1999 by the EU and the US. This has the effect of lifting SMP prices by 30.9% and butter prices by 17.4%.

In other studies on trade liberalisation, the OECD models the impact of the EU’s Common Agricultural Policy (CAP) reforms.[21] These reforms change the way in which subsidies are paid to EU farmers (who are among the most heavily subsidised in the world). Rather than based on their level of production as previously was the case, farmers will now receive the same payment each year. The OECD find that with the lower incentive to farmers both dairy and beef production will fall. More specifically they estimate that (relative to baseline) the beef cattle inventory will be 1% lower in 2006 and 2.4% and 3.2% lower in 2007 and 2008 respectively. This is similar for the dairy cow inventory which is predicted to be 2.2% lower in 2006 and 0.9% lower in 2008.

The lower dairy cow inventory will impact on EU dairy production. Butter exports are expected to fall by between 16% and 19% between 2005 and 2008. SMP and whole-milk powder (WMP) exports are also expected to decline by between 8% and 21% for SMP and 12% and 22% for WMP over the same time period.

This reduction in EU production and exports will impact on the world price for dairy products. The world price for butter is expected to be 3.4% higher in 2008 with smaller increases in price for SMP and WMP. Similar price increases were estimated for beef in the longer term as production falls.

These simulation studies illustrate the importance to New Zealand of reducing world protectionist trade policies.

5.3.2  Growing presence of South America

One issue that does not support as much optimism for world commodity prices from New Zealand’s perspective is the emergence of other primary commodity-based exporters such as South America. This is particularly the case for dairy exports where some countries in South America have experienced rapid growth in their milk production. Brazil, in particular, has experienced 25% growth in its milk production between 2000 and 2005. Brazil’s dairy cow population is currently around 20 million with those cows producing around 25 billion litres of milk.[22]

Dairy sector growth in Brazil has been constrained by the fact that around 40% of milk is produced on small, non-specialised farms. Per cow productivity, and willingness to grow, remains relatively low in this sector. However, the emergence of increased numbers of large-scale commercial operations with low production costs has pushed up milk supply.Phillips, 2006:2

The potential for Brazil (and other South American countries) to improve their per cow production through the adoption of more modern equipment, the increased use of fertiliser, and the sowing of new pastures mean that it is going to have a growing presence in the global market. This increased milk supply could have a depressing effect on world dairy prices.

5.4  What are the growth impacts?

Section 2 of this paper found that, for New Zealand, the level of export prices and import price volatility (and to a lesser extent, total terms of trade volatility) had important implications for New Zealand’s growth. It concluded that the level of (real) export prices between 1950 and 2005 has had a positive impact on New Zealand’s GDP growth while (real) import price volatility has had a negative effect. This section therefore looks at what the outlook for the terms of trade, as discussed above, implies for New Zealand’s economic growth going forward.

The previous section described a number of factors that could influence particularly the level of export prices, in the future. These were, for example, the likelihood of further increases in soft commodity prices as demand from China grows as a result of a larger proportion of its population becoming exposed to higher income levels. The trend of New Zealand exporting a greater share of goods with a higher value-added content could also see the level of export prices higher in the future as primary commodities are “de-commodified”. Finally the continuation of world trade reform, particularly for agricultural products, is also likely to be positive for New Zealand’s export prices. These factors all have the potential to result in higher average export prices in the future and as shown in Section 2.3.1, this could have also have positive economic growth implications for New Zealand.

Section 2.3.1 also suggested that terms of trade volatility, particularly volatility in import prices, has had a negative effect on New Zealand’s economic growth. As mentioned above, the majority of New Zealand’s capital investment goods are sourced from overseas and therefore if these import prices were volatile it may deter a firm from making new investment decisions which would have negative growth impacts. Section 3.2 showed how the volatility in New Zealand’s terms of trade has reduced and that the reduction in export price volatility was the significant contributor to this. Therefore it is surprising that export price volatility was found to have had an insignificant effect on economic growth. It may be because this is being picked up in the reduced terms of trade volatility as a whole rather than just the level of export price volatility. Although there was no discussion of the outlook for import price volatility in the previous section, the trend of New Zealand exporting a more diverse array of goods is likely to see the volatility in the terms of trade remain at low levels (by historical standards) in the future and this could also have positive growth implications for New Zealand.

However as mentioned above, the outlook for the terms of trade is uncertain and some of the factors that pose positive implications for New Zealand export and import prices could also have negative implications. As a result of this the future growth implications are also uncertain.

Notes

  • [21]The figures quoted are based on the OECD’s “maximum decoupling” scenario.
  • [22]In comparison to Brazil, New Zealand’s dairy herd is currently around 5 million cattle producing approximately 14 billion litres of milk per year.
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