Mercantilism returns from the grave

Recently the Labour party came out in support of the idea of subsidising exporters. While this idea has been sold as a road to prosperity for New Zealand, such subsidies are nothing more than a get rich quick scheme – a scheme that will line the pockets of a few while lowering the living standards of many.

When it comes to export subsides, economists have a name for this type of government policy, and it is called mercantilism. Mercantilism is far from a new idea, in fact when modern economics was born mercantilism along with physiocracy were two other competing schools of thought. Physiocrats believed all wealth derived from land, while mercantilists determined that wealth came from exports and balance of payments surpluses.

The 18th Century writings of Adam Smith, and later David Ricardo, put this school of thought to the sword – recognising that although mercantilist policies such as export subsidies helped to enrich the merchants who sell overseas, they did so by impoverishing many of the people within a nation.

Since the 18th century, our understanding of society and the economy has improved – but this has not prevented people lobbying the government to try and serve their own interests.

A number of people may think I am being unfair comparing the mercantilist policies of today to the policies of the 18th century. Countries such as Japan, South Korea, and now China have enjoyed periods of rapid growth after undertaking active export focused policies. By building the capability to produce manufactured goods, these nations were able to pull themselves out of poverty – this is known as infant industry policy.

However, such an argument is not relevant for New Zealand. Far from being the impoverished backwater we like to pretend we are, New Zealand is an extremely wealthy country that has concentrated on what it is good at and made sure it does it well – specifically agricultural production. Unlike Japan and South Korea, we do not have the population density to make or sell manufactured products as effectively. As a result, the New Zealand economy has concentrated on producing agricultural goods and tourism services effectively, and has sold these overseas to pay for televisions, computers, and cars.

By insuring that property rights are protected, removing trade barriers, and improving our relationships with trading partners, the National and Labour governments of New Zealand’s recent past have done a stellar job of ensuring that New Zealand has prospered.

However, part of the process of growth is creative destruction. Industries and jobs in the non-food manufacturing arena have been wiped out as countries in Asia have pulled their way out of poverty by creating competition for these firms. In the end, this process benefits the citizens of New Zealand with cheaper goods and helps people who are pulling themselves out of poverty overseas, but it comes with a steep near term cost for those who have made their way in manufacturing.

Ignoring this cost is not fair. But the proposed solution of export subsidies is a poor one – instead of allowing the process of creative destruction take place, this circumvents it and makes everyone else in New Zealand pay in order to prop up a set of inefficient industries. An export subsidy is a transfer of wealth from New Zealand consumers to New Zealand exporters and consumers overseas. So, essentially, each one of us would be forced to pay more tax simply to send to people overseas – all in the interest of a small group of New Zealand manufacturers.

If, as a society, we truly want to help those who have lost their manufacturing jobs, then a better solution is to subsidise training and help pay for services that makes it easier for people who lose their jobs to figure out what sort of skills are valuable. By helping the losers from globalisation learn new skills, we help to reduce the costs associated with the process of creative destruction, while still gaining the benefits of innovation and higher incomes.

Some may say my view is naïve, or antiquated. They will point out that countries such as China continued to subsidise industry, and that the net result of this subsidisation is to make New Zealand manufacturing less competitive than it would be in the face of free trade. This is all well and good, but again I would point out that these subsidises are a transfer from Chinese taxpayer to the New Zealand shopper. Once the benefits of setting up “infant industries” are done with, these inefficient subsidies will be nothing more than a transfer of wealth from China to New Zealand. As a result, should we be the ones complaining or should it be the citizens of China?

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