3 The tradable sector

3.1  The importance of the tradable sector to the economy

Although there are reasons to suspect that exchange rate variability may have a negative impact on exporters' performance, whether or not this is detrimental to economic growth and broader living standards in the overall economy depends on what role exporters (or tradable producers more generally) play in an economy. The tradable sector may be particularly important to the New Zealand economy for two reasons.

First, research shows that exporting firms are more productive on average than other firms (figure 2). Given this, a larger export sector would tend to raise economy-wide productivity. This could be either because more productive firms tend to self-select into exporting, or because firms actually become more productive when they export. The empirical literature supports the former. The argument that more productive firms export is based on the weight of evidence that in order to export, firms must be productive enough to afford the fixed costs of entering export markets. These include factors such as transport costs, marketing costs, skilled personnel and modification costs of producing for foreign consumers (Adalet, 2007).

Figure 2: Labour productivity of exporters compared with all firms

Source: Buckle, Hyslop and Law (2007)

However, there is some theoretical literature that supports the idea that firms become more productive when they export (known as learning-by-exporting), because they can improve through the learning effects of being exposed to international markets (for example, through knowledge flows from new buyers). It also increases competition, which can lead to improved innovation, efficiency and economies of scale. Evidence on learning-by-exporting is mixed and tends to depend on the chosen country and methodology.

The second reason why the tradable sector might be particularly important for the economy is the role the sector plays in reducing New Zealand's external vulnerabilities. New Zealand has a large net external liability position,[4] and the willingness of foreign investors to continue lending to New Zealand depends on their confidence that New Zealand's liabilities will be serviced at face value in the long-run. The export sector plays a key role in this regard, since servicing net liabilities requires the ability to earn foreign exchange, largely by selling goods and services abroad.

3.2  How has New Zealand’s tradable sector performed relative to other countries?

Before the impact of exchange rate fluctuations on the tradable sector is considered, it is important to have an understanding of how New Zealand's tradable sector has performed. It therefore makes sense to compare New Zealand's tradable sector performance to other, relevant countries in order to understand if New Zealand's experience is unusual. However, it is difficult to compare New Zealand's tradable sector performance with that of other countries.[5] In particular, conclusions drawn often depend on the measure and the comparator countries chosen.

OECD data suggest that New Zealand's export sector has performed less well than the best performers, but in line with a number of other countries. Figure 3 shows that the ratio of real exports to GDP has not grown significantly over the last decade in Australia, the United Kingdom, the United States and New Zealand. Canada has seen a decline in its ratio of real exports to GDP over the last decade, while Switzerland, Sweden and South Korea have seen a significant increase.

Figure 3: Real exports to GDP by country

Source: OECD

However, gross measures of exports can give a misleading read of tradable sector performance. It is therefore useful to also consider value-added measures. Typically, manufactured goods are produced using a significant proportion of imports. The absolute difference between what is exported and the import component of the exported good or service matters in determining what is adding the most value to an economy. New Zealand's exports tend to have a low import content, mainly due to its comparative advantage in primary production (White, 2007). Because of this, gross measures of exports may understate the value that exports are contributing to the economy.

Black, Vink and White (2002) found that after adjusting for such compositional effects, New Zealand's export performance has not been materially different from that in other advanced economies. Recent work by Treasury suggests that New Zealand's share of import content in its exports is similar to that found in the research by Black, Vink and White (2002).

New Zealand's tradable to non-tradable output ratio compared to other countries' ratios can also give some insights into the relative performance of New Zealand's tradable sector.[6] Figure 4 suggests that the ratio of the tradable to the non-tradable sector has been declining in New Zealand since 2000, broadly consistent with several other countries in the OECD that have experienced either declining or relatively flat ratios.[7] South Korea, Switzerland and Sweden stand out as the countries that have shown a marked increase in their tradable to non-tradable output ratios. Importantly, New Zealand's declining tradable to non-tradable output ratio is similar to some other relevant comparator countries, such as Australia,[8] Canada and the United Kingdom.

Figure 4: Real tradable/non-tradable sector output ratio by country