High $ hits import substitutes more

The high value of the New Zealand dollar against the United States dollar does erode returns for exporters who trade in that currency.

But it’s manufacturers competing with imports who are finding it most difficult:

In its review of current economic conditions the Reserve Bank last week noted exports of manufactured goods have not fallen over the last three years, and are worth at present close to $4.5bn a year. But while manufactured volumes have held up, the high NZ dollar is encouraging continued substitution with imports, as it lowers the price of imports relative to domestically produced goods and services. The RBNZ says while prolonged weakness in the NZ construction sector has contributed significantly to the divergence “it appears the high NZ dollar is negatively affecting import-competing firms to a greater extent than exporters.”

This highlights the benefit of our open borders for domestic consumers.

In the not-so-good-old days tariffs and import restrictions kept goods produced overseas out of New Zealand.

Producing things we couldn’t import did protect jobs here but that protection came at a very high price.

We had less choice about what we bought and domestically produced goods were often of lower quality and/or higher price.

The job losses and business closures which followed the opening of our borders got headlines.

The stories of existing businesses which adapted and new ones which set up and prospered by producing things people here and in the rest of the world wanted to buy often went unnoticed.

The trading environment, here and overseas, isn’t easy. But meddling with the exchange rate, subsidising local firms or closing our borders to imports would be band-aid solutions which would take us back to the bad-old-days.

Economic Development Minister Steven Joyce described calls for meddling a snake oil salesman solution:

He says the Reserve Bank’s fundamental objective has to be inflation and keeping the NZ economy on track over time. “You cannot say to the Reserve Bank we want you to favour one particular industry against a whole bunch of other things that are going on. That is not the answer. The answer is to make NZ businesses more competitive. That’s what our business agenda’s about. It’s investing in skills. It’s investing in innovation. It’s investing in the RMA to get things happening. It’s investing in growing export markets.”

Anyone who remembers the 80s knows that such snake oil solutions eventually poison the economy which has then to be treated with strong and very unpalatable medicine.

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