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C & D

Free Trade Agreements

One of the major changes over time, particularly over the last few decades has been the freeing up of economies. The Treaty of Rome was the forerunner to the European Union. This created a large free market between the original members, with tariffs or quotas being imposed on goods produced outside the member states. Effectively the rules were set so the home teams had a significant advantage.

For New Zealand, this meant that our traditional market for agricultural products became seriously limited. Fortunately over time alternative markets were developed and continued to be developed for these products. Instead of being price takers, marketers had to become price makers.

One of the major turning points for the New Zealand economy was the free trade agreement with Australia which gave New Zealand access to a much larger market. At the time this was around six times the size of our domestic market. New Zealand consumers as well as exporters benefited from this. We had a larger range of consumer items. But then there was price competition. Clothing manufacturers struggled to compete with their Australian counterparts, so jobs were lost. However jobs were created in other areas, where New Zealand had a competitive advantage.

With increasing globalisation, there were plenty of opportunities. Each free trade agreement reached increased export opportunities. Importers relished the opportunity to be able to source extremely competitive goods from a multitude of different countries, especially China and more recently, developing South East Asian countries.

One of the major issues of free market economies is that people like access to lower priced, good quality goods, as long as it does not cause job losses. Invariably job losses seem to occur in areas where unions have a strong foothold. Seldom are jobs being lost in highly skilled highly paid sectors of the economy such as IT.

There is always someone somewhere who will manufacture low tech items at a lower cost. For example Nicky Hager parents’ factory in Levin, could not compete with shirt manufacturers from China, Vietnam, Bangladesh, Pakistan etc. Hager himself went hi tech using stolen emails as the basis on which to write books. Twenty years earlier he wouldn’t have been able to.

Many of the jobs New Zealand’s middle-skilled workers once took for granted can now easily be outsourced or contested. This “contestability” is increasing as more jobs are able to be relocated or replaceable with computing power due to advances in communications technology. Movie production and special effects are a testament to market areas that New Zealand could not compete in, only a matter of a few years ago. Those industries are large employers and the employees are highly paid.   They developed their skills.

The financial services industry in New Zealand has taken an interesting path. Many of the financial institutions are foreign owned, despite there being no real need for this. Banking, an essential sector, is dominated by Australian owned banks. Fund managers became increasingly Australian centric in their operations. The introduction of KiwiSaver has changed this somewhat as a number of the providers are now New Zealand owned and operated, showing that the competitive advantage that Australia had in this area has largely been eroded.

For New Zealand, globalisation has increased consumer choice and reduced costs, albeit at the expense of largely, lower paid and relatively unskilled workers. It has also dramatically increased opportunities in areas that hardly existed a few years ago. New Zealand largely weathered the effects of the GFC, thanks largely to our exports to China. If it wasn’t for our free trade agreement with China, most likely we would have felt a lot more economic pain than we did.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.