Cheap Imports Cost Jobs

KiwiRail’s problems with their Chinese-built rolling stock have provoked a predictable reaction, and not just from workers at the Hillside engineering works in Dunedin. That reaction will have intensified at the news that hardwood sleepers imported from Peru now constitute a safety risk.

It is understandable that many will see this as poetic justice. But, as KiwiRail’s management have argued, “these things happen”; and these problems may have passed without comment but for the fact that Kiwi jobs were lost in the process.

Yet, even if the Chinese-built rolling stock had performed well, the case would still have raised some important issues. When does it make sense to import, even if Kiwi jobs are lost as a consequence, and when does it not?

The conventional wisdom is that if it is possible to source goods more cheaply from overseas, then it makes sense to do so. Otherwise, the argument goes, efficiency and competitiveness will be jeopardised by costs that are higher than they need be and the domestic firm’s viability will be jeopardised.

Some would go further. For them, to deny the market’s judgment would be sacrilege. It is not only right for individual firms to buy from the cheapest supplier, they would argue; it is also in the best interests of the economy as a whole.

According to this view, there is no point in trying to maintain a domestic capability if the same product can be made better or more cheaply elsewhere. Better to accept that there are some areas where we can’t compete, and to move our labour and capital to industries where we can develop and exploit a competitive advantage.

In that way, it is said, we concentrate on what we are best at, and the law of comparative advantage will then – provided that our exchange rate is correctly aligned – give us an edge, and allow us to move resources to areas where we can out-perform our rivals. Workers might be inconvenienced by having to change jobs, but they will gain better-paid and more secure employment, in the long run, in industries where we are more likely to be competitive.

There is a good deal to be said for this approach. The whole focus on free trade under successive governments, after all, has proceeded on the basis that it is worth sacrificing production and jobs in a range of industries – clothing, footwear and carpets are examples – in return for expanded opportunities in overseas markets for those products that we are good at producing.

Unfortunately, the comforting theory about perfect competition doesn’t always work out in practice. There are often a number of awkward factors that distort what is expected to be a proper balance of gain and loss.

The goods we import instead of making ourselves might, for example, have a higher value than those we concentrate on exporting. That seems to be the case with China; while we congratulate ourselves on increasing our primary product exports to China, we try not to notice the much greater increase in the value of our manufactured imports from that country. And we have to pay for those imports across the foreign exchanges, imposing a further burden on our balance of payments – a burden we already struggle to manage.

Furthermore, whatever the market says, we may be prepared to pay a premium for goods made in New Zealand on the ground that they are more likely to meet our particular conditions and requirements, and to offer better after-sales service, than would cheaper imports. And we may have strategic reasons for wanting to maintain some manufacturing capability in areas that the market tells us are difficult for us; we may not wish, in other words, to become totally dependent on overseas suppliers for goods that we can’t do without.

Most importantly, if we are to take this absolutist view that the market is always right, we need to be very sure that our own domestic policy settings are correctly positioned to allow us to make the strategy work.

We would need, first, to ensure that our exchange rate is correctly aligned so that we get the best advantage from exporting the goods we are best at producing. But we fail abysmally in this respect; because we use the exchange rate to restrain inflation, we don’t allow it to perform its proper function – and, as a result, we ensure that even our best exporters get a lower return than they should while importers are given a head-start advantage over our own production.

And if we are serious about sacrificing jobs so that workers move to more productive jobs elsewhere, we’d better make sure that those jobs really exist. Again, we don’t even get close. With high unemployment already, the government’s emphasis on cuts and its tolerance of an overvalued dollar ensure that workers whose jobs are destroyed by imports have nowhere else to go.

If we are blithely going to trade jobs for cheap imports, we should surely make certain that the theory is not contradicted by what we actually do?

Bryan Gould

2 August 2012

This article was published in the NZ Herald on 7 August