if sheep could be freely traded......
March 18, 2002
Going the Wrong Way
Down a One-Way Street
In following the path advocated by the high priests of free trade, it is difficult to find a country that has gone further than this one. So why has New Zealand, a nation that ranked as one of the world's richest in the 1950s, performed so poorly since then?
Anyone who has followed President Bush's decision to increase tariffs on imported steel can probably guess the answer. More than anything else, New Zealand is the victim of hypocritical international-trade policy on the part of the world's biggest countries. The loudest proponents of free trade -- the U.S. and the leaders of the European Union -- have refused to open their markets to New Zealand's best products.
New Zealand is blessed with vast tracts of fertile soil and a subtropical climate that means growing seasons are long and livestock needn't be sheltered from cold. As a result, it probably costs less to produce lamb or milk here than any other place in the world. In 1953, while many other nations were still recovering from World War II, New Zealand had the third-largest economy, based on per capita gross domestic product. Today, it ranks 23rd.
The slide partly reflects the unfortunate fact that less efficient agricultural nations subsidize their farmers and impose quotas and tariffs on imports, including those from New Zealand. One of the worst blows came in 1973 when Britain, which had long maintained quota-free trade with its onetime colony, joined the European Community, and New Zealand lost its unhindered access to the British market.
During the same period, New Zealand's government adopted an increasingly interventionist role in its own economy, trying to mask fundamental problems with controls on prices, wages, interest rates, imports and foreign-currency transactions.
After the economy reached the breaking point in the early 1980s, a new Labor Party government entered office with a reformist platform. Spearheaded by Roger Douglas, the finance minister, the government introduced comprehensive changes at a pace that made Ronald Reagan and Margaret Thatcher's reform efforts appear dilatory.
Import licenses were eliminated, state-owned enterprises privatized and entire categories of regulations eliminated. Tariffs on imported goods, among the world's highest, were eliminated or sharply reduced. Today 95% of New Zealand's imports (by value) are duty free.
Knighted for his achievements, Sir Roger became a hero for free-market advocates around the world. But while the economy's performance improved, it still didn't keep pace with the rest of the developed world. While Sir Roger blames that on his inability to go even further with his reform efforts, he also blames trade restrictions overseas, and that underscores that trade can't lift an economy if it is a one-way street.
"We didn't have the power to say that we'll reduce our tariffs to 'x' if you reduce yours to 'y,' but we would liked to think that the other countries would follow suit," he says. "If they did, New Zealand would be a much richer country."
Of course, there are other constraints on New Zealand's economy. With a population of less than four million people, its domestic market is tiny, and it is one of the most geographically isolated nations. "It's our location and our product mix," says Mike Moore, a former New Zealand prime minister who is the director general of the World Trade Organization.
But, noting that wealthy countries spend $1 billion every day to subsidize their agricultural industries, Mr. Moore, too, cites the devastating impact of trade barriers.
"If those barriers were eliminated," says Alan Bollard, the secretary of the treasury, "not only would the economy enjoy enormous growth, but we would tend to overcome some of the problems of our geographic isolation because the growth would cause more investment and more people to move here."
New Zealand's predicament isn't unique. Many developing countries much poorer than New Zealand are restricted from selling their most competitive products because of domestic political concerns in the wealthiest countries. This double standard is a crucial point today, at a time when the U.S., while protecting its steel makers, is trying to get poor nations to join in another round of market-opening talks that Washington says are in their best interests.
What should New Zealand do? Its diplomats already spend a lot of time attacking protectionist measures against its exports. They won a significant victory last year when the WTO ruled that the U.S. had violated the organization's rules when it sharply raised tariffs on New Zealand lamb in 1999. But it was a rare win. "It's a rear-guard action," Dr. Bollard says. "We know that New Zealand can seem like a faraway place that doesn't really matter to countries where there is domestic political pressure to protect an industry."
Some economists believe New Zealand should adopt an 'if-you-can't-beat-them, join-them' strategy. Philip Meguire, an American economist who teaches at the University of Canterbury here, suggests that New Zealand should work to persuade the North American Free Trade Association to expand its membership to include New Zealand as well as Australia. "The world is clustering into clubs," he reasons. "If New Zealand isn't proactive, it won't have any choices, and it will end up being part of a club it doesn't want to have anything to do with."
-- G. Bruce Knecht
Write to G. Bruce Knecht at bruce.knecht@wsj.com1 |
