Free trade not assured path to economic prosperity

New Zealand is still reliant on primary commodities, such as logs, to pay its way in the world. Photo: Stephen Jaquiery
New Zealand is still reliant on primary commodities, such as logs, to pay its way in the world. Photo: Stephen Jaquiery
Is New Zealand’s obsession with free trade restricting economic prosperity? Peter Lyons asks.

I tell my students that New Zealand is the Zsa Zsa Gabor of free trade agreements. They usually stare back at me blankly. Zsa Zsa Gabor was a Hungarian beauty and international celebrity who had nine husbands . Her proclivity towards marriage was legendary. She was once asked how many husbands she had had. Her reply was, ‘Do you mean, apart from my own?’.

We are wedded to the doctrine of ‘‘free trade’’. This was part of the free market mantra we adopted in the 1980s. There was no real discussion or debate. We were told by those who ‘‘knew best’’ that free trade would be good for us.

This doctrine has been continued by successive governments. We have accepted free trade as the default position for our economy. We continue to sign endless free trade agreements.

Yet after almost four decades of open trade with other countries we are still hugely reliant on primary commodities to pay our way in the world. We ship milk powder, eggs, cheese, butter, meat, and logs overseas and get fuel, computers and electronics, cars and clothing in return.

We sell services such as tourism and education to help pay our way in the world.

This fits with standard trade theory, based on a concept called comparative advantage. This concept was described by David Ricardo in the early 19th century. It is the belief that a country should concentrate on producing stuff that it can make most efficiently compared to what else it could make.

A country’s comparative advantage is usually determined by its resources. Our main resource has historically been fertile land hence our reliance on primary produce such as milk powder, butter, cheese and meat. We fit the basic classical theory of trade.

But this theory, taught in Economics 101, does not tell the whole story.

Free trade sounds very logical. But there are considerations that are seldom acknowledged by free trade zealots.

Free trade can result in a country becoming specialised in low value-added commodities like milk powder or butter or logs. This means they are price takers on world markets.

The world price of milk powder has a huge influence on the viability of dairy farmers in New Zealand. We have no control over this price. This makes our economic wellbeing very fickle.

Free trade may ensure a country specialises in producing items that experience diminishing returns. Farming is generally such an industry. Eventually we will run out of fertile land. We will reach peak cow. We are likely almost there.

High-income countries, such as Switzerland, tend to specialise in producing stuff with increasing returns such as pharmacueticals, computer software, high-end manufacturing, specialised foodstuff, music and movies. The greater the output, the lower the average cost of output and the higher the returns. This generates higher wages for workers.

Free trade tends to benefit certain sectors of the economy to the detriment of others. In theory the winners could compensate the losers and everyone would gain. In practice this never happens. Economic theory has shown that free trade benefits the owners of the abundant resource in a country because it increases the size of their markets.

This is a major benefit of free trade. In recent years free trade has tended to benefit the owners of capital and fertile land. But it has reduced the wage bargaining power of less skilled workers.This magnifies income inequalities. It also invites a political backlash. This helps explain the political rationale behind Brexit and Trump.

We are a country that has embraced free trade and globalisation. We have been an international champion of economic openness. But we have embraced a very simplistic economic ideology. Richer nations tend to produce high-value-added products that generate higher profits and incomes.

Britain, followed by the United States, became wealthy by using selective protectionist policies. They embraced free trade only after their industries had become dominant on world markets. Recent Asian successes such as Japan, South Korea, Taiwan and China have used protectionist policies coupled with export-led growth to create huge economic success.

Our obsession with free trade may have locked us into a reliance on low value-added commodities and services that restrict our economic prosperity. Signing endless free trade agreements may not be the route to economic prosperity. Our trade and industrial policies need to be smarter and more proactive to move our comparative advantage to higher value-added products that generate higher incomes and better jobs.

Peter Lyons teaches economics at St Peter’s College in Epsom and has written several economics texts.

Comments

The other effect of free trade with repressive regimes such as China is that criticism of their human rights record is suppressed in countries that sign deals with them. New Zealand is the poorer for giving up our independent voice in a world where money is more important than principles.

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