"Foreign made" is in our best interest

If you haven’t seen the new poster for the"Buy New Zealand made" campaign, it features an attractively attired woman,asking the question, "Does my economy look good in this?"   The implication, ofcourse, is that we should think carefully about the damage wrought when wepurchase foreign-made goods.  

As an economist, I am loath to criticise acampaign that features pretty models urging us to think more about theeconomy.   But, to my great dismay, there simply isn’t any intellectual merit tothe campaign’s message.   Buy all the foreign products you want – it won’t hurtthe domestic economy in the slightest.  

In fact, there is a common school ofthought, one actively supported by current government policy, that implies thatif New Zealand is to climb up the OECD economic ladder, we are going to have tobuy far more imports.   Let me explain.       

Where exactly does the bizarre idea thatimports are bad come from?   Perhaps media coverage is partly to blame –whenever we hear of large-scale job losses, the reasons normally given areeither businesses moving offshore or succumbing to foreign competition.  However, the number of jobs lost in this manner is a small fraction of the jobsthat vanish each year, which are in turn is almost always smaller than thenumber of jobs created.   Empirically, the relationship between imports and joblosses just doesn’t exist – over the last 15 years, unemployment has beentrending lower even as import concentration has been increasing.  

Actually, this shouldn’t surprise anyone.  If we think harder about the trade process, it becomes clear that there is anerror in the intuition that when foreign goods are purchased, spending power(and thus jobs) vanish from the domestic economy.

The mistake begins with the terminology.  We don’t "buy" imports, we swap for them.   In order to purchase thatChinese-made dress, our poster-girl first needs to find someone willing to takeher New Zealand dollars in exchange for Chinese currency.   But New Zealanddollars serve only one purpose – you can buy New Zealand produced goods or services(exports), or you can lend them to New Zealanders who will in turn buy NewZealand produced goods or services.    

So the money does not disappear – we canonly buy imports if there is someone willing to accept our exports in return,either now or in the future (if the money is used for lending).   And, indeed,imports and exports tend to closely balance over the long-run.   Over the last 20years New Zealand has had an average trade surplus of 0.9% of GDP.

Here we normally encounter a slightly moresophisticated complaint.   When New Zealand is running a trade deficit (as iscurrently the case), we are borrowing from the rest of the world.   The argumenthas been made that the New Zealand economy would grow faster if New Zealanderssaved more, and the government has responded with numerous policies designed toencourage us to do so.       

But regardless of whether New Zealanders’savings are sufficient or not, buying New Zealand made still can’t impact onthe trade balance.   The New Zealand economy is already producing at full capacity(or more than capacity, judging by the Reserve Bank’s monetary policy stance).  There aren’t any spare resources to produce more for domestic consumption, soany switch from imports to New Zealand made goods would have to be matched by aone-for-one decrease in our exports to the rest of the world.   The tradebalance, and thus the savings rate, would be unaffected.         

To increase our savings rate, we eitherhave to buy fewer imports full-stop, or buy less New Zealand-made goods(allowing us to export the surplus).   In other words, if we wanted to redesignthat poster so that the message actually made economic sense, the model wouldhave to be wearing nothing at all.

Now that I’ve illustrated that theinexorable consequence of importing less is exporting less, hopefully it isapparent why going out of your way to buy New Zealand made is a fundamentallysilly idea.  

In case you’ve forgotten, we’re still inthe government’s designated "Export Year 2007".   Plenty of time and money isspent in an attempt to encourage and aid New Zealand companies to export more.  And the New Zealand Institute has argued loudly that New Zealand desperatelyneeds more large economic champions, exporting to the rest of the world, toboost our growth rate.   Successful companies require economies of scale, andthey can’t get that if they remained confined to the small New Zealand domestic market.         

But unfortunately, if New Zealand’s future success requires us to export a much larger share of output to foreign markets,our import share must also rise to replace all the domestic goods we no longermake.      

Existing government policy is gearedtowards increasing the share of output we export.   The "Buy New Zealand made" campaignencourages us to increase the share of output we consume locally.   I think wecan all agree that it is a mathematical impossibility to do both at the sametime, but nevertheless the government will be spending $11m over the next fouryears to convince us otherwise.

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