[asia-apec 1169] NZ: Tariffs - article from The Independent

[Gatt Watchdog]

>From The Independent Business Weekly, Auckland
30/06/99

Tariff report faulted for focusing on the positive
Bob Edlin

A study commissioned by the Ministry of Foreign Affairs and Trade has
affirmed the obvious - tariff removal has cut the cost and increased the
consumption of some goods.

But the ministry's terms of reference excluded all other economic
effects and some economists question the value of the findings.

"If BERL had been asked to do the job, I would have refused to have
accepted terms of reference that said we only had to look at the reduction in
costs," said BERL co-founder Bryan Philpott, emeritus professor of economics
at Victoria University.

"I would have told them to go away and hire a junior clerk to do
that."

The report by the Institute of Economic Research was released last
Friday by Prime Minister Jenny Shipley.

The research was confined to the costs of just four consumer goods
previously subject to high tariffs - cars, household appliances, shoes and
clothes.

Shipley at the launch nevertheless enthused about the employment and
wage effects of removing import duties.

"More New Zealanders have jobs than ever before and they are earning more than
before - and all this over the same period that we, and Labour before us,
have cut import taxes,"she said.

Moreover, people were "getting a deal for each dollar they earn and spend."

But the terms of reference had specifically steered the researchers away from
employment, wage and other effects.

The study found:

* When prices at March 1998 were compared with levels that would have
pertained if tariffs had been held at March 1987 rates, prices for cars were
about 16% lower; household appliances about 9% lower, shoes about 5% lower;
clothes about 15% lower.

* Those price differentials were projected to allow for the complete phase-out
of tariffs and lagged effects of tariff pass-through into domestic prices.
Comparing prices projected to March 2010 with prices that would have pertained
if tariffs had been held at March 1987 rates, prices for cars will be about
31% lower; household appliances about 16% lower; clothes about 34% lower.

* These four items account for about 25% of total real household spending and
tariff reductions enabled consumers to record a 7.3% gain in purchasing power
by 1998.  This will rise to 13.3% in 2006 and 14.1% in 2010.

* In 1998, the average consumer gained $7.30 a week, or was about 4% better
off as a result of the tariff cuts.  Gains for the average household were $22
a week.

* By 2010, the gain for the average consumer increases to $14.10 a week,
making the average consumer about 8% better off.  By then, the average
household will have an extra $42 a week or $2,180 a year as a result of the
tariff cuts on the four selected products.

But Philpott challenges the worth of the study, contending that when
economists want to study the effects on the economy of tariffs, exchange rates
or any other policy instrument, "you must do it in a general equilibrium sense
of looking at the whole economy and how it changes the real welfare of the
populace," which is conventionally measured by the gross domestic product in
real terms."

Just looking at reduced prices "is rubbish," said Philpott.

He took issue, too, with Shipley: "It's ridiculous to say we've got a
situation approaching Nirvana simply because we took the tariffs
off."

He agreed many more cheaper goods were available, but this included many
second-hand Japanese cars and it was equally true the quality of goods had
deteriorated.

Moreover, he said it was a well known assertion in economics that the results
of free trade were very small, even under the best of assumptions.

They probably were negligible or negative under realistic assumptions in which
there was no appropriate exchange rate adjustment.

Integrated Economic Services' John Lepper said prices were set
interdependently with outputs in a market, "so you can't just look at prices
in isolation from the effects on production."

The ministry's study therefore was "a partial piece of work."

Lepper said there were two important consequences of ignoring the effects of
tariff rate changes on production.

First, there was a wealth effect.  When prices of assets like cars dropped,
people holding those assets suffered a loss because their wealth was reduced.
When they bought new cars, the trade-in value of their old car was much less
than it used to be and the financial difference they had to make up had
increased, making it harder than before to buy a new car.

Second, there were employment and other effects on local communities affected
by tariff reductions, such as South Auckland, Porirua, Upper Hutt and Levin.
Welfare dependency increased and people were trapped by falling house prices
so they couldn't afford to move elsewhere to find another job.  Whole
communities had no hope and no new avenues for their energies. Rising crime,
suicide and so on were the inevitable result.

Those problems were well established in economic literature and must be taken
into account to judge if the effects of tariff change on a society were good,
bad or indifferent.