Free trade for free countries

Matthew Yglesias at Slow Boring reiterates the case for American free trade with likeminded countries. 

What we ought to be doing is trying to minimize the total amount of trade barriers, and thus the economic cost of pursuing competition with China, by reducing as many trade barriers as we can. We should stop complaining about cheap Canadian lumber. We should stop blocking imports of Latin American sugar. We should let Toyota sell cheap small trucks to Americans who want them. We should, frankly, probably start buying (or leasing2) warships from Japan and Korea, where they actually know how to build ships. America is toast in a conflict with China if we can’t count on cooperation with our friends, so we may as well optimize on maximum economic efficiency and the freest possible trade within the free world. This also applies to quasi-trade in professional services — we should make it easier for foreign doctors to practice here, and have the FDA and European drug regulators work together so approval by one agency will let you sell on either side of the Atlantic. There’s a lot we can do to work together internationally and increase prosperity.

It seems obviously crazy that the US wants countries to reduce trade links with China while setting tariffs on countries that it calls friends and allies that encourage them to trade with China instead. 

That was my column over in the Post on Monday. 

I think it's a bit crazy that New Zealand has been talking about tighter defence arrangements with the US without having a secure trade deal with the US already in hand. China is our largest trading partner. We have a free trade agreement with them. And while there have been occasional bits of weirdness facing goods entering, they don't stick giant tariffs on our exports. 

Easy to check this for yourself, even though MFAT in general seems to prefer not making a big deal about how protectionist America is (contrast MFAT's correct and explicit views on the evils of Canadian trade practices, with softpeddling on America's). 

MFAT has a Tariff FinderMFAT has a Tariff Finder. Click the Exporting button; you're pretending to be a NZ-based exporter. Then compare tariffs on your exports if you're exporting to China, and if you're exporting to America. You can find China among the FTA partner countries on the drop-down list; the United States is on the non-FTA partner list. 

When NZ got its FTA with the UK, people made a big deal about onions now getting tariff-free access to the UK. So let's check onions. The US charges 0.83 cents/kg; no tariffs for entry into China. 

Is the Chinese ambassador wrong when he says that China has been a more reliable trade partner for New Zealand than the US has been? 

NZ trade with China can be subject to holdups at the ports if the Chinese government is mad at us - and what happened with Australian wine is concerning. 

But NZ trade with the US depends on madness in American farm states and whatever populism Congress wishes to appease [and trade with Canada is even worse - America at least tries to do its protectionism within the rules; Canada signs agreements it knows full well it will immediately break]. 

Anyway. 

If US trade policy really were about global geostrategic stuff, rather than mainly being protectionism, they would be opening trade as Yglesias suggests. 

And while neither the Republicans nor the Democrats show much interest in being reliable trade partners for anyone, I'd be a bit nervous about AUKUS. 

End to the golden trade weather

Vangelis Vitalis knows what he's talking about in trade, making this particularly depressing. 

At BusinessDesk ($, you should subscribe; I do)

Vitalis said the rules NZ depended on at the WTO were no longer fit for purpose. 

“We can still take cases, but their foreseeability now is really in question because you can no longer hear appeals to the case.”  

Geopolitics 

Vitalis said geopolitics was back in a way “that we have not experienced previously”, particularly between China and the United States which was “intense and difficult”. 

“Don’t get caught in the cross fire. If you’re in any doubt about how challenging and bruising this can get, just ask Australian wine exporters, just ask Australia barley exporters, just ask Australia coal exporters.” 

As recently as the weekend, Australia withdrew its action against China at the WTO after it dropped tariffs on Australia barley, which had been in place for three years. 

Australia is, however, still pursuing its action on wine tariffs. 

Vitalis said the challenges out there were real and NZ was going to need to think about how it managed and mitigated those risks. 

NZ had relied on US leadership in trade policy for big achievements, such as Uruguay Round, however they were no longer in that space.

China is a more reliable trade partner for New Zealand than the US is, if New Zealand is willing to never say much about the Chinese Government's atrocities. 

The US claims to be a partner and claims to want to reduce Chinese influence in the Pacific. But when it comes down to it, Congress is more interested in protecting its farmers from competition from NZ meat and dairy. Persistent problems in US baby formula supply chains; NZ has lots to sell, but the US prefers to keep blocking it. 

So if you're Prime Minister, what the hell do you do? 

Take a more principled stand on geopolitics, which would likely mean sharp restrictions on NZ exports to China and continued US refusal to allow imports from NZ? Get friendlier with China, which could make it harder for NZ to keep doing awesome stuff in the aerospace sector that depends on tech transfer agreements with the US? Try to keep balancing on an ever-narrowing beam?

Cost of living absurdities

Peaches come from a can.

They were put there by a man.

In some factory in Greece.

When they made their little way

out to brighten a Kiwi’s day,

they got hit with a 34% punitive anti-dumping duty.

Prime Minister Hipkins made the cost of living the government’s number one priority. So I checked which anti-dumping duties are still in place.

Anti-dumping duties rarely make sense. The theory is that a foreign company will sell here, below cost, for long enough to drive Kiwi competitors out of business, and then jack up prices. 

It’s more than a bit bonkers. Consider coated steel from Korea – a kind of steel used in roofing. From 1 January this year, imports from one Korean company were hit with a renewed 12.6% punitive tariff, and two other Korean companies are subject to smaller tariffs. 

Under anti-dumping theory, they were selling steel here below cost to drive the Kiwis out of the market, so they could profit when those Kiwi competitors went under. But a quick Google search finds 998 suppliers of the stuff across 55 countries. The 997 other suppliers would be the ones to benefit. 

And, of course, if it really were being sold here below cost, anyone, including Kiwi steel producers, could put up a shed and store tonnes of it for later resale. 

Inflation is high and the government says we’re in a cost-of-living crisis, with groceries and building materials front and centre. But those Korean companies’ roofing steel, along with galvanised wire from Malaysia and China, are hit with anti-dumping duties. So you’re protected from affordable building products. Doesn’t it warm your heart? Tariffs are love. 

And consider the peaches. Everyone loves canned peaches. The '90s band The Presidents of the United States of America even wrote a song about them. I ripped it off to lead this post. 

In May last year, the Government reimposed antidumping duties on preserved peaches from Spain. In December, they started investigating Chinese peaches. And the peaches from Greece? 34% duty. 

Meanwhile, the Commerce Commission’s been investigating why groceries and building materials are so expensive. And the government is subsidising petrol while taxing peaches. 

So I’ll end with another bit of theft from the Presidents. 

Government lingered last in line for brains

And the one that it got was sorta rotten and insane.

Afternoon roundup

The closing of the many tabs:

• EU trade talks with NZ are on. European consumers who worry about food security, food prices, and access to the only lamb that, to the best of my knowledge, Peter Signer has granted caveated ethical approval - they should be telling their governments to ditch the tariffs and quotas on NZ ag exports. 


• Elizabeth Rata has a blog.


• That doesn't solve the problem, Camus. Like sure, you're right - but in a trivial sense. You've just pushed the question up a level. 


• How not to build a stadium. Or, better, perhaps they shouldn't be building a stadium. 


• NZ fares poorly in the latest world competitiveness rankings.


• It's especially when you have low-quality informal institutions that competent mayors matter. I wonder what a replication of this work for NZ would look like. 


• NZ has a lot of options for drivers who want to take jobs on apps. Uber, obviously. But also Lyft, Ola and anyone else can enter the market if they want. The Employment Court is trying to decide whether Uber drivers are employees. It's an odd kind of employment if someone can have three or four different apps open at the same time, taking jobs as they come. Macfie takes a very union-sympathetic position; haven't seen other reporting on the court case.  


• A new taskforce to try to unblock building materials, with a focus on plasterboard. Looking to consenting will matter, but the overarching issue will still be getting councils out from under joint-and-several liability. 


• Radio New Zealand cheering on the creation of a new cartel, mostly because they have no clue how occupational licensing works. 


• Bad news for beer drinkers - price is going up (as it is for everything else).


• AML rules still killing remittances.


• Jenny Ruth picks up Geof Mortlock's worries about RBNZ.

Morning roundup

A closing of the browser tabs:

• Hard to believe that anybody thought it was a good idea to rebuild an old masonry building on reclaimed land when the city has trouble funding infrastructure for housing, but Wellington Council did. $180 million now for Town Hall. Wasn't the library also going to be $180 million? 


• Chinese state media outlet correctly chides the Americans about America's lack of free trade in dairy. 


• Solveig Lucia Gold, on what Princeton's done to her husband.


• It just seems less plausible to me that cat-caused toxiplasmosis runoff into salt water is a bigger problem for endangered dolphins than fishing bycatch. 


• Enabling carbon capture and storage would be great.


• Marc Daalder summarises the state of play on long-Covid in NZ.


• I'd first heard of difficulties in making productive use of land held under Maori land tenure shortly somewhere around 2008. Tanira Kingi gave a talk about it at the Law & Economics Association meetings. It turned into a book chapter that's dated 2008 anyway. I can't remember the year of the LEANZ session - it was a day of sessions after the NZ Economic Association meetings. It's still a problem - great stuff from RNZ on it. 

Afternoon roundup

A very long overdue closing of the browser tabs brings these worthies:

• There's now a big solar plant running in South Taranaki. Remember: this is the ETS and the electricity market working. The electricity market doesn't care about the source of the power; it pays the going rate. The ETS increases the cost of thermal and especially increases the cost of coal. This plant's from Todd Energy. 
• If I'm reading this right, we could have a free trade agreement with India if we had more liberal immigration settings. That sounds like win-win, post-Covid. Unfortunately, political pressure in India leans against free trade unless it also helps make migration easier, and the current New Zealand government hates migrants and migration. 
• Alcohol & Drug use, crime, and a proposal for Victoria building on both RAND's 24/7 study and New Zealand's Drug & Alcohol courts.  
• Hungary's communist revolution didn't much affect intergenerational mobility. Greg Clark and co-authors look at surnames there 1949-2017 and find social mobility under communism was about the same as social mobility post-communism. 18th Century nobles families still do well. Romani do poorly under both. Did you know that Nicolas Sarkozy's Hungarian minor-nobility origins is indicated by the y at the end of his name?

Protecting the Canadian Dairy Cartel

Canada might not be playing fair under the CPTPP. 

Here's Farmer's Weekly:

In the two years since the agreement came into force low-tariff and tariff-free quota created to open their markets to more imports of dairy products have gone largely unfilled.

Canada has been the worst offender, with just 12% of quota for dairy imports from CPTPP countries filled last year and just 4% so far this year.

In Japan just 40% of dairy quotas have been filled while fill rates have also disappointed in Mexico.

Dairy Companies Association of NZ executive director Kimberly Crewther said administrative foot-dragging by the three countries’ governments, along with President Donald Trump’s withdrawal of the United States from the agreement in 2017, meant the $96m of annual gains predicted for the industry once CPTPP was fully implemented now looked unachievable.

Not a particular surprise that the Canadian government would pull whatever tricks it could to support the dairy cartel.

The Ministry of Foreign Affairs and Trade was aware of the problem and raised it with Canadian, Mexican and Japanese counterparts and was due to do so again at an online meeting of CPTPP officials last week.

Crewther said it was disappointing but not unusual for countries to use quota administration to protect local industries from the increase in imported competition that followed free trade agreements.

“The agreement of new access in FTAs is great but it is the implementation around that access that is really crucial to whether it is usable or not.”

In the case of Canada up to 85% of quota was allocated to local processors who sourced subsidised raw milk from the country’s farmers and tended not to import dearer foreign dairy products.

Only 10% was for importers, who were also prevented from getting their hands on quota allocated to local processors but not used.

Canada’s chronic underutilisation of its CPTPP import quotas was reinforced by its Milk Class 7 milk payments system, which subsidised prices paid to local farmers and undercut imports and has long been a bugbear of the NZ industry and other exporters.

NZ's excellent trade response to Covid-19

In the Stuff newspapers this week, I laud New Zealand's maintained commitment to free trade in critical goods. 

Back in March, Canada, Australia, Chile, Brunei and Myanmar signed on with NZ and Singapore to a statement endorsing keeping supply chains open and removing restrictive measures on essential goods.

Last week, Singapore and New Zealand fleshed out what that means for them, with a list of a pile of products that will be moving to tariff-free status. It's an open plurilateral agreement: any other country who wants to join is is free to sign up by agreeing to the what's in the agreement as written.

I really hope other countries join in.

A snippet:

As New Zealand increasingly and deservedly draws the international spotlight, Prime Minister Jacinda Ardern could do well in asking other countries to sign on to the agreement her government has come to with Singapore.

Trump's response to the pandemic has looked far too much like the 1930 Republican Congress's response to the Great Depression: an insular knee-jerk protectionism that only makes things worse both for Americans, and for everyone else. It is a model of what not to do.

Ardern's government has been providing a vision of a better way. One that does not beggar its neighbours, and itself in the process.

It is a vision that should prove compelling beyond New Zealand and Singapore. Ardern should appeal for others to join us.

Open for business?

Bryce Wilkinson and I go through some of the proposed changes to New Zealand's Overseas Investment Regime over at Stuff.

Well, went through. The piece came out last week, but I'd missed that they'd put it up.

An opening snippet:

Sometimes, being at the front of the queue isn't a good thing.

If you lined countries up in a row, starting with the places least friendly to foreign investment, and ending with the places with the fewest restrictions, New Zealand would be near the front of the queue. In the OECD's 2018 survey, only Jordan, China, Malaysia, Russia, Indonesia, Saudi Arabia and the Philippines were more restrictive – and most countries were far more liberal.

So it is a bit odd to hear Trade Minister David Parker talking this week about the need to tighten up New Zealand's foreign investment regime. The Overseas Investment Act and its implementation need reform, but substantial tightening is not what needs to happen. Are we trying to catch up with China or vault past Russia in these leagues?

1973 is the new black

Richard Harman's Politik newsletter is one of my few daily NZ must-reads. 

He's unlocked today's headline piece.

You should read it and subscribe.

New Zealand's top trade official is flying to Britain to be there when Britain proposes to leave the EU on March 29 to deal with any threats to New Zealand’s lamb exports.

In recent weeks British farmers and a key Cabinet Minister have called for massive tariffs to be placed on New Zealand lamb.

POLITIK understands that the Ministry of Foreign Affairs and Trade is so concerned about the threats that it wants its Deputy Secretary, Trade and Economic, Vangelis Vitalis, on the ground in London as Britain quits the EU.

Two years ago we were imagining opportunities for a UK-NZ free trade deal. Michael Gove pretended to be somebody who liked free trade, and that the EU was holding a free-trading Britain back.

NZ lamb currently enters the EU under a tariff-free quota: imports up to the quota are without tariff. The EU and UK are looking at ways of splitting up their shares of that quota. But:

But Gove, speaking six days ago at the British National Farmers’ Union conference said:” One thing I can reassure you is that it will not be the case that we will have zero rate tariffs on food products. There will be protections for sensitive sections of agriculture and food production.

“You (farmers) have argued that we need tariffs on sheep meat, beef, poultry, dairy, both milk and cheese; and pig meat in order to safeguard domestic production,” he said.

“Your concerns have been heard, and an announcement on new UK tariffs in a no-deal scenario - with specific and robust protections for farming - will be made shortly.”

Hopefully Gove's misspoken here and there won't be an end to tariff-free access to the UK.

Good thing New Zealand has pursued a very broad free trading agenda, including the Trans-Pacific Trade Agreement and the China-NZ FTA. Just in case NZ winds up getting the shaft - again - instead of a NZ-UK FTA.

Here's Gove's full speech of 19 February. It does not include the line saying there will be no zero-rate imports. But the BBC's coverage included it:

Many supporters of Brexit argue that tariffs on food and other items should be scrapped in order to lower prices for consumers. But farmers fear that cheap imports and lower standards would destroy many parts of British agriculture.

"Your concerns have absolutely been heard," Mr Gove told a conference of the National Farmers' Union (NFU). "It will not be the case that we will have zero-rate tariffs on food products.

"There will be protections for sensitive sections of agriculture and food production."

He added that an announcement on a no-deal tariff schedule "should be made later this week".

1973 was a betrayal. I hope Gove was misquoted or misspoke here. Pulling this stunt, after NZ sent negotiators to help the UK, and after May provided NZ with assurances about trade continuity...

Let's all wish Vangelis the best of luck. In a better world, he'd be heading there to negotiate the expansion of the NZ-Australia free trade and free migration area to include the UK and Canada. Not to beg that NZ be able to continue lamb exports.

Disgraceful

This is absolutely not how a member of a government that is trying to defend the World Trading Organisation's rules-based framework should be behaving. 

From Question Period late yesterday:

David Seymour: Has the Minister had advice in any form that some of his provincial growth fund expenditure may have to be reported to the World Trade Organization as it qualifies as agricultural subsidies—the first time New Zealand would have reported such subsidies in 25 years?

Hon SHANE JONES: Yes. Naturally, advice has been sought from the foreign affairs department. However, given that the adjudication and the appeals of so-said international trade body are in a state of disarray, I'm not bothered by that at all.

The WTO is under substantial threat. New Zealand desperately needs the continuation of a strong rules-based trading system.

It is bad enough that Shane Jones's provincial growth fund threatens New Zealand's subsidy-free agricultural system. But saying, effectively, that he doesn't care what the WTO thinks because it's useless - that completely undermines everything Minister Parker has been working for in our international trade positioning.

Update: I'd caught this on Morning Report this morning, but couldn't remember at what point in the broadcast. They've helpfully pointed me to it. Radio NZ also reports that Shane Jones's outfit had to change a press release about a loan to Taranaki Pine; a reference to the loan helping to make the factory competitive was removed.

But if that was part of the reason for providing the loan, whether or not it's mentioned in the press release should be irrelevant to whether it's something that gets us in trouble with WTO.

Labour needs to keep a closer eye on what its coalition partner is up to here. They are putting too much at risk.

Afternoon roundup

This afternoon's worthies:

• Things that make me wish genetic data were in New Zealand's Integrated Data Infrastructure: polygenic scores predict 11 percent of the variance in educational attainment. (full paper here). 
• Matt Nolan's back at TVHE, defending GDP against the fashionable types. 
• There's reasonable support in New Zealand for some cannabis legalisation, but people are still way conservative about allowing marijuana sales in stores - only the Greens are sensible on that one. Me on that stuff from earlier this year; NZIER from before that. 
• The Productivity Commission's terms of reference for its review of local government look good, but note that Labour has excluded discussion of capital recycling through privatisation of some existing Council assets. One excellent way of generating the capital for a new project is selling off an old one. Prod Comm's not allowed to say that. 
• Do you want pirates?
• Epistocracy now!
• Dick Puddlecote on vaping developments in NZ. And note that the Smokefree Coalition's now suggesting a pause on tobacco excise increases. I'd say we should be rolling back the last ones, but great to see more support for a pause. 
• I'm very glad that New Zealand sporting events aren't military recruitment drives. Meanwhile, in America...
• Caving in to internet bullies sets bad precedents.

Why CANZUK?

Mike Reddell wonders why I support CANZUK, the movement wishing to expand the Australia-NZ free mobility area to include Canada and the UK.

I’ve never been quite sure what to make of the CANZUK cause. I read a lot of imperial/Commonwealth history, and ideas like this sort of free movement area among the old ‘white Dominions’ are strikingly reminiscent of calls for an imperial federation or, much later, for imperial trade preferences (which became a big thing as the UK moved away from free trade itself).  I could be a little provocative and suggest that is wasn’t entirely dissimilar to the sort of immigration policies New Zealand and Australia ran until a few decades ago, that could be  –  not entirely inaccurately –  characterised as “white Australia” or “white New Zealand” policies.  In that sense, I’ve always been a bit puzzled by Eric Crampton’s enthusiasm for this particular formulation, when he is so ready to characterise sceptics or opponents of New Zealand’s current immigration policy as “xenophobes”.   The logic of his position looks as though it should favour open borders more generally, not just among these four advanced, fairly culturally similar, countries.  And yet, for example, even as an example of Commonwealth sentiment, not even South Africa –  let alone Zimbabwe, Kenya or Namibia – appears in the CANZUK proposal.

I favour global free trade. My first-best preference would be that every tariff and trade barrier would be abolished tomorrow. Where that isn't possible, I prefer unilateral tariff reductions and membership in as many free-trade areas as possible. I supported the free trade deal with China, but that was hardly in opposition to supporting free trade with other places too.

I understand that there is a lot more opposition to immigration than there is to trade. But most of the usual criticisms of free migration don't apply to a free migration area between Canada, the UK, Australia and NZ. People flocking here from any of those to get free health care? Nah. People flocking here from any of those to collect welfare? Not plausible. They'll destroy our culture somehow? Depends on your thoughts on British cuisine I guess.

I don't buy those arguments against more liberal immigration policy with other countries either, but I expect I'm there in a minority.

It would be an odd free-trader who'd object to a free-trade deal with China when one's on the table just because it isn't a global free-trade deal.

It would be a puzzle if I supported a Fortress version of CANZUK that would close the borders to immigration from outside the region. I don't support that. CANZUK, plus continue letting people from other places become Canadians, Kiwis, Australians and Brits.

US CTPP accession?

Trump's made some noises about seeking to join the CTPP agreement - after having pulled the US out of the TPPA negotiations. 

Should the CTPP countries let him in?

Recall that Trump's steel tariffs, from which Australia are exempt but New Zealand is not (or at least wasn't when last I checked) were justified on national security grounds. WTO Article XXI allows tariffs to protect industries critical for national security. The tariffs weren't put in place for national security. They were put in place for domestic political reasons or because of demons in Trump's head. But try proving that quickly or cheaply in a WTO dispute tribunal.

The CTPP has similar protections built in.

Article 29.2: Security Exceptions
Nothing in this Agreement shall be construed to:
(a) require a Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests; or
(b) preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

These kinds of provisions (standard in trade agreements I believe) work among states that you can expect to behave like adults. The United States isn't like that currently. Why let them in? If they are admitted, what are the odds that Trump just invokes security exceptions again to undo whatever's negotiated?

There's risk we'll have eaten dead rats on copyright only for Trump to declare butter in need of protection for national security reasons.

Inter-provincial rivalries

When I was at Canterbury, the mainlanders would joke about cutting the Cook Strait cable and letting the North Island float away so the North Islanders couldn't bother them any longer.

Interprovincial rivalries in Canada are a bit less jokey, given the crazy trade barriers between provinces and the barriers to labour mobility caused by provincial licensing schemes.

But this one is fun. The National Post's Tristin Hopper runs the "What if the Alberta/Saskatchewan cold trade war turns hot?" scenario.

Peace has returned to the Canadian prairies. After Saskatchewan suddenly banned Alberta license plates at provincial construction sites, an escalating interprovincial trade war has been averted at the 11th hour thanks to a climbdown by Regina.

Despite this welcome détente, what would happen if Saskatchewan and Alberta ever reach a future impasse so great that it led to armed conflict?

The notion is too horrible to consider: Brother against brother, Lloydminster divided, countless great works of Saskatchewan architecture destroyed by shellfire. Nevertheless, below is our embarrassingly thorough assessment of what The Great Prairie War might look like.

Read the whole thing; it's pretty comprehensive. Alberta takes the Cold Lake CF-18s; Saskatchewan's CT-144 trainers are no match. Saskatchewan's geography makes things simple for Albertan snipers, but presumably also makes it easier to see the incoming Albertan tanks. But the British Army training base in Ralston, Alberta could prove decisive.

Anyway, glad to be Outside the Asylum, where nobody could imagine banning an Otago tradie from working on an Auckland construction site. As they say, when goods don't cross borders, armies will. Canadian provincial protectionists take heed.

The costs of policy uncertainty

From the latest issue of the American Economic Review (gated):

We examine the impact of policy uncertainty on trade, prices, and real income through firm entry investments in general equilibrium. We estimate and quantify the impact of trade policy on China’s export boom to the United States following its 2001 WTO accession. We find the accession reduced the US threat of a trade war, which can account for over one-third of that export growth in the period 2000 – 2005. Reduced policy uncertainty lowered US prices and increased its consumers’ income by the equivalent of a 13-percentage-point permanent tariff decrease. These findings provide evidence of large effects of policy uncertainty on economic activity and the importance of agreements for reducing it.

Accession of China to the WTO gave China the same Most Favoured Nation status as other WTO members. That meant that the US could not impose trade punishments on China whenever it got mad about Chinese policy. The paper notes that the risk of this was high prior to WTO-accession as the House kept voting to remove China's MFN status post-Tienanmen.

They generate a variable on trade policy uncertainty to put into the gravity equations for trade. Trade policy uncertainty winds up mattering - folks don't want to sink investments into trade relationships if policy can wipe them out quickly.

Now think about the effects of government-induced policy uncertainty in the downtown Christchurch rebuild. Wellington focused on trying to provide certainty around demand in the Christchurch downtown and paid no attention to the uncertainty it was generating around supply and investment through its fiddling with precincts, what was allowed where, whether there would be a new convention centre (and when and where)...

Overseas Companies

A little known feature of New Zealand's overseas investment regime: New Zealand companies are covered by it if enough of their shares are bought by foreigners.

Here's Calida Smylie at the National Business Review:

Several major listed companies are counted as overseas persons, even though they have no single dominant overseas owner, including Fletcher Building and Air New Zealand.

Agri-business operations are particularly affected by the OIO’s restrictions on land use by foreign people or companies, because once they reach the 25% threshold they must apply to the OIO when renewing or taking on any new leases or buying land.

Other countries chase foreign investment; New Zealand is so enthusiastic about driving it away that it even counts New Zealand companies that wind up with a broad-enough set of owners. I wonder whether this discourages companies from listing publicly.

Cartel's gonna cartel

Canada's dairy cartel continues to impress. After Canada negotiated increased access to Canadian markets for European cheesemakers, the dairy cartel managed to do this:

Under the terms of the Comprehensive Economic and Trade Agreement (CETA), Canada has agreed to allow nearly 18,000 additional tonnes of European cheese to be imported tariff free.

But CBC News has learned that when Canadian officials briefed their European counterparts on how they would allocate the quota for importing this new cheese, not everyone around Europe's cabinet table felt Canada's approach lived up to the spirit of the negotiations.

A European official, speaking on the condition of anonymity because he was not authorized to speak, characterized the state of things as a "row."

Canadians haven't been transparent enough about several aspects of CETA's implementation, the source said, and presented the cheese quota decision as a non-negotiable fait accompli. It was a final straw for upset Europeans who had been otherwise eager to get on with the deal.

The source said Canada informed the EU that 60 per cent of the new import quota would go to domestic dairy producers and processors. Europeans fear they won't use it, so fewer new cheeses compete with their domestic products.

If the quota's unused, or there's any incentive to delay imports, Europe could be effectively denied the market access it fought for years to get. CETA provides a way for complaints like this to be resolved, but Europeans would prefer not to have to sue Canada after the fact, the source said.

Emphasis added. So opening up to greater access to European cheeses gives the bulk of that import quota to the existing dairy cartel. Recall that rather a few of Canada's dairy processors are cooperatives owned by quota-holding Canadian dairy farmers; I've not seen anything on how that 60% gets split. If a decent chunk goes to the companies that haven't quota interests, maybe it wouldn't be so bad.

But still: more reasons to be skeptical about the merits of including Canada in free trade deals if trade in agricultural goods matters.

Looking East (well, and North)

Vernon Small reports on an interesting new survey about Kiwis' attitudes about foreign affairs:

But opposition to Trump is nevertheless boiling over into attitudes towards the United States itself.

It was no surprise that a Stuff/Massey survey this week recorded scant backing for Trump; 15.2 per cent in a theoretical world where Kiwis could vote in the US. Defeated Democrat Hillary Clinton scored 51 per cent and others – probably Bernie Sanders in the main – took the rest.

Polls last year showed a similar trend. Given New Zealand's political spectrum starts somewhere to the left of the Democrats, that would likely be replicated in any Republican-Democrat run-off.

But the biggest surprise was respondents' views in a three-way test of where our bilateral efforts should be aimed. About 42 per cent picked the UK, reflecting our historical links, 42.5 per cent went for China and only a paltry 15.6 per cent for the US.

Put in the context of New Zealanders' (anecdotal?) suspicion of Chinese immigration, investment and land purchases – and the political hay made on those issues by NZ First and more recently Labour – that is a stunning finding.

If New Zealanders are looking to China for leadership and bilateral links over the US (in a conservative and male-heavy sample) then something profound is going on.

Tillerson did his best to address the policy issues and assert the US's commitment to the region and rules-based solutions.

He reaffirmed its interest in trade deals – albeit bilateral ones where New Zealand will be well down the pecking order or, even more ephemerally, multilateral deals in the future.

Emphasis added.

New Zealand has a free trade deal with China; America doesn't really do free trade anymore.

Retail innovation

New Zealand retail's problems are deeper than a 15% GST-at-the-border levy. Here's what Amazon is doing. Marvel at the innovation.

This all said, I believe that Amazon is the most defensible company on earth, and we haven’t even begun to grasp the scale of its dominance over competitors. Amazon’s lead will only grow over the coming decade, and I don’t think there is much that any other retailer can do to stop it.

The reason isn’t the bullet-point moats that are talked about in headlines, and it isn’t the culture of innovation or Bezos’s vision as CEO (though I do think Amazon’s culture is incredible and Bezos is the most impressive CEO out there). It’s the fact that each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition.

I remember reading about the common pitfalls of vertically integrated companies when I was in school. While there are usually some compelling cost savings to be had from vertical integration (either through insourcing services or acquiring suppliers/customers), the increased margins typically evaporate over time as the “supplier” gets complacent with a captive, internal “customer.”

There are great examples of this in the automotive industry, where automakers have gone through alternating periods of supplier acquisitions and subsequent divestitures as component costs skyrocketed. Divisions get fat and inefficient without external competition. Attempts to mitigate this through competitive/external bid comparison, detailed cost accountings and quotas usually just lead to increased bureaucracy with little effect on actual cost structure.

The most obvious example of Amazon’s SOA structure is Amazon Web Services (Steve Yegge wrote a great rant about the beginnings of this back in 2011). Because of the timing of Amazon’s unparalleled scaling — hypergrowth in the early 2000s, before enterprise-class SaaS was widely available — Amazon had to build their own technology infrastructure. The financial genius of turning this infrastructure into an external product (AWS) has been well-covered — the windfalls have been enormous, to the tune of a $14 billion annual run rate. But the revenue bonanza is a footnote compared to the overlooked organizational insight that Amazon discovered: By carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation.

Read the whole thing. Amazon is amazing. There's a reason that you can parallel import things, as a consumer, for a much bigger price discount than the 15% GST gap.

I've been a skeptic about arguments for applying GST at the border, mostly because the main methods for doing so amount to non-tariff barriers: holding goods up at customs pending GST payment. I also think that if there's a distortion favouring imports because of the GST issue resulting in some allocative inefficiency, we should also consider that competitive pressure from those fringe parallel imports may make prices for domestic consumers more competitive as well.

But if Amazon does become increasingly dominant, that does simplify things a bit - if Amazon were willing to collect GST on its shipments to New Zealand.