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• 3. Previous Reduction Impacts

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• 3.1 Macro Level
  • Gross Domestic Product
  • Consumer Benefits
  • Exports and Imports
  • Manufacturing Sector
  • Employment in the Overall Economy
• 3.2 Industry Level
  • Employment Impacts - Total Manufacturing
  • Employment Impacts - Clothing, Footwear and Transport Equipment
  • Textiles, Clothing, Footwear and Carpet Industries
  • Motor Vehicle and Automotive Component Industry
• 3.3 Firm Level
• 3.4 Summary

38. The Post-2005 Tariff Review was the sixth general tariff review to occur since 1987. All five previous reviews led to programmes of annual tariff reductions over three or four year periods. The programmes took the form of proportional cuts with the exception of the 1988-92 programme which adopted the Swiss Formula, designed to reduce tariff peaks and create a more uniform tariff.

Table 1: Dutiable MFN Tariff Rates 1987-1999⁶

Source: Ministry of Economic Development

39. This section examines how tariff reduction has affected the economy at the macro, industry and firm levels. A particular difficulty with analysis of tariff reduction is that the costs associated with tariff reduction tend to be concentrated in certain industries and are therefore very visible. The benefits from tariff reduction, on the other hand, tend to be widely dispersed throughout the economy and tend to accrue over a much longer time horizon. Another particular difficulty is attempting to isolate the effects of tariff reduction. Macroeconomic cycles have occurred and there has been a broad range of policy changes since 1984. The removal of import licensing between 1988 and 1992, for example, played a role in many of the effects discussed in this section. As such, the points made below cannot be solely and directly attributable to tariff reduction. A more direct relationship, however, is identifiable in the case of the clothing, footwear and transport equipment industries. For these three industries, previous tariff reduction is correlated with a decline in these industries.

40. Four sources of information have informed the analysis on the impacts of past tariff reduction:

• information collected from submissions and meetings;
• firm level case studies;
• a review of relevant literature; and
• the Infometrics report which used census data to establish whether there was any correlation between tariff changes and changes in employment by industry, region, ethnicity, gender, household type and income decile.

3.1 Macro Level

Gross Domestic Product

41. General equilibrium modelling work undertaken by Infometrics estimated that the GDP increase from reducing tariffs from their 1986/1987 levels to current rates was 0.3 per cent.⁷ This equated to around $414 million in 1995/1996 prices, or about $300 per household. The model provided a comparative static analysis and therefore did not take into account the dynamic effects of tariff reduction that continue to accrue over time. These dynamic gains may have been much larger than the static gains and include increased productivity, innovation, transmission/uptake of technology, product choice and product quality. Anecdotal evidence suggests that the gains to productivity as a result of reducing tariffs were very significant for the agriculture sector which has seen significant productivity growth rates of 4 per cent per annum.⁸

Consumer Benefits

42. Tariff reduction has lowered consumer prices. Comparing prices as at March 1998 with price levels that would have pertained had tariffs been held at their March 1987 rates, NZIER calculated that prices for household appliances were 9 per cent lower, shoes 5 per cent lower and clothes 15 per cent lower (NZIER 1999a).

43. Price decreases have resulted in increased consumer purchasing power (NZIER 1999a). Low-income earners have benefited proportionately more, although the consumer benefits for Māori have been less than for non-Māori (NZIER 1999b). In a study of four items (cars, household appliances, shoes and clothes) NZIER conservatively estimated that tariff reductions between 1987 and 1998 raised average household spending power by $22 per week (NZIER 1999a).⁹ Another indicator in identifying consumer benefits is examining the percentage of household spending on particular items. Household spending on apparel (traditionally a highly protected industry), for example, has fallen: in 1988 apparel accounted for 4.3 per cent of household spending; in 2001 it accounted for only 2.5 per cent (MFAT 2002).

44. A report to the Minister of Commerce in 1998 identified that as a result of tariff reduction:

Product quality has improved. There is a greater focus on customer service. Furthermore, import competition has spurred innovation, resulting in new products which are more suited to the needs of customers (MOC 1998).

Evans, Grimes and Teece, (1996) as well as Easton (1998) also argued that consumer choice, as well as the quality of goods and services had improved as a result of tariff reduction.¹⁰ These effects, however, are very difficult to measure and generally do not appear in GDP figures.

Figure 1: New Zealand's Total Exports and Imports 1985-2001

Source: The Treasury and Statistics New Zealand

Exports and Imports

45. While imports have increased as a result of tariff reduction, this has not occurred at a quicker pace than the rate of export growth (see Figure 1). The value of New Zealand's advanced manufactured exports, in particular, increased substantially from $2,900 million in 1990 to $8,200 million in 2001 (MFAT 2002).

Manufacturing Sector

46. The manufacturing sector remains a significant contributor to New Zealand's economy. Output has risen from $14,435 million in 1988 to $16,672 million in 2001.¹¹ Manufacturing's contribution to GDP, however, has fallen from 18.3 per cent in 1986 to 15.5 per cent in 2001.

47. Over the period 1987-2001 employment in manufacturing fell by 9.2 per cent (see Figure 2). This was partly attributable to tariff reduction. Between 1986 and 1991 there was a significant fall of 30.3 per cent, but since 1991 manufacturing hours have largely stabilised. They rose by a marginal 1.9 per cent between 1991 and 1996, but then retreated by 3.7 per cent over the 1996 to 2001 period. In 2001 the sector still employed a significant number at 285,100.

Figure 2: Employment by Sector 1987-2001

Source: Household Labour Force Survey, SNZ 2002a

48. The rise in advanced exports, the increase in output and the fall in employment suggest an improvement in productivity across manufacturing.

49. At the same time as manufacturing's share of the economy has fallen, the share of services has increased. This trend in New Zealand is consistent with a general trend in developed countries towards services and was well underway before New Zealand reduced tariffs. Technological change is the main driver behind this long-term trend. Mechanisation, for example, has freed up resources, in particular labour, to be used in non-manufacturing sectors of the economy.

50. Tariff reduction has put pressure on the manufacturing sector to seek international markets as its domestic market share has fallen. While much export growth is attributable to CER and global trade liberalisation, tariff reduction has been central to New Zealand firms becoming increasingly export oriented with a greater focus on supplying and developing niche markets. For example, plastics exports¹² rose from $132 million in 1986 to $401 million in 2001, metal products exports¹³ rose from $982 million in 1986 to $1,737 million in 2001 and food products exports¹⁴ rose from $1,371 million in 1986 to $3,292 million in 2001.

Employment in the Overall Economy

51. Despite a decline in total employment up to 1992 (much of this occurring in the manufacturing sector) total employment has steadily increased since 1992. This has been largely due to growth in the services sector (see Figure 2). In tandem with this employment growth, unemployment rates have steadily fallen across the economy overall.

52. It should be noted, however, that there is no longitudinal study that has tracked displaced workers. This means that it is not possible to categorically state that it has been displaced workers who have filled opportunities that the economy, since 1992, has generated. It is likely that those entering the labour market with new skills had a higher likelihood of filling employment opportunities than many displaced workers who were working in fading firms that invested little in upskilling. For these displaced workers finding alternative employment is likely to have been comparatively difficult. However, given the steadily improving employment levels and falling unemployment levels since 1992, it appears that displaced workers have been among those finding employment.

3.2 Industry Level

53. For profiles on the textiles, carpet, footwear, clothing, motor vehicle and automotive component and plastics industries refer to Appendix C.

54. Table 2 shows the hours worked in each manufacturing industry over the period 1986-2001. The greatest reduction (over 80 per cent) was recorded in footwear. The next largest employment changes (50-80 per cent) were recorded in the tobacco, clothing, rubber, glass and paper industries. Transport equipment fell 45 per cent, food and metal manufacturing fell 25 per cent, but plastic manufacturing's hours worked increased marginally.

Table 2: Weekly Hours Worked in Manufacturing 1986-2001

Source: Infometrics from Statistics New Zealand Census figures

55. Despite the fall of employment in TCFC, metals, food products and automotive components, the Infometrics report showed that there have been substantial increases in exports recorded by each of these industry groups (see paragraphs 50 and 72).¹⁵

56. While the overall correlation between tariff changes and employment was low, industries that experienced the largest tariff reductions showed large employment reductions. At the same time, not all industries that showed large employment losses experienced substantial tariff reductions. The three examples where there was a significant correlation were footwear, clothing and transport equipment.¹⁶

Employment Impacts - Total Manufacturing

57. When looking at the employment effects by region since 1986, most job losses in manufacturing were in the Auckland TLAs and the lower North Island TLAs. The manufacturing employment losses in the Auckland TLAs were offset by employment increases in other sectors. This was not the case, however, in some of the lower North Island TLAs.¹⁷

58. Ethnic analysis identified Pacific peoples, Māori, and Asians as being more affected by the fall in manufacturing employment than Europeans/Pākehā, particularly between 1986 and 1991. Pacific peoples were the most affected. (Refer to paragraphs 63-65 for further ethnic analysis)

59. Gender analysis showed that the gender composition of manufacturing employment changed only marginally between 1986-2001.

60. Income deciles 1 and 2 (the lowest income earners) showed the largest declines in their share of overall manufacturing hours when comparing 2001 with 1991. Offsetting these declines were increases in deciles 4-8.¹⁸ This indicates that a higher proportion of manufacturing employment is now undertaken by workers in middle income brackets, although this shift is not significant.

61. In terms of household type, solo parents were most affected by the decline in manufacturing employment. However, their rate of employment in other sectors rose strongly and more than offset the decline in manufacturing, particularly over the period 1996-2001.

Employment Impacts - Clothing, Footwear and Transport Equipment

62. Employment in the clothing industry as a share of total manufacturing employment fell by 61 per cent between 1986-2001. Footwear fell by 83 per cent and transport equipment by 45 per cent.

63. Employment in the clothing and footwear industries showed a similar decline across all ethnic groups. The exception related to Asians for whom the clothing industry became more important as a manufacturing employer. In the transport equipment industry, all ethnic groups experienced a reduction in employment, with Pacific peoples and Asians experiencing a sharper decrease. The decline in importance of the clothing, footwear and transport equipment industries therefore led to disproportionate impacts on Pacific peoples and Asians.

64. These negative ethnic impacts should be viewed against positive employment indicators in the economy overall for Pacific peoples and Asians. Both Pacific peoples and Asians experienced greater employment growth during the 1986-2001 period across the economy than other groups. This is primarily attributable to higher working-age population growth rates and increased Asian immigration. Between 1986 and 2001 hours worked by Pacific peoples increased by 38 per cent, compared to an 11 per cent increase across all ethnic groups.¹⁹ The employment share of the Asian group increased more than three-fold across the total economy between 1986 and 2001.

65. Unemployment rates for Pacific peoples and Asians have been falling over the last decade. Unemployment rates are, however, still significantly higher than 1987 rates for Pacific peoples and Asians:

• in 1987 the unemployment rate for Pacific peoples was 6.1 per cent. In 1991 it had risen to 22.7 per cent. By 2001 it had fallen to 11.2 per cent which was still 5.1 per cent higher than 1987;
• in 1987 the unemployment rate for Other (Asians are the predominant group in this category) was 3.1 per cent. In 1991 it had risen to 10.5 per cent. By 2001 it had fallen slightly to 9.5 per cent which was still 6.4 per cent higher than 1987;
• in 1987 the unemployment rate for Māori was 10.8 per cent. In 1991 it had risen to 21.1 per cent. By 2001 it had fallen to 13.0 per cent which was 2.2 per cent higher than 1987; and
• in 1987 the unemployment rate for European/Pākehā was 3.2 per cent. In 1991 it had risen to 6.5 per cent. By 2001 it had fallen to 4.3 per cent which was 1.1 per cent higher than 1987. (data from SNZ 2002a, p. 58)

66. The percentage of female employment in the clothing and footwear industries remained relatively static between 1986 and 2001. These industries, however, are the only two industry groups with majority female employment (around 80 per cent of employment in clothing was female in 1986-2001). Females represent only a very small proportion (around 10 per cent) in the transport equipment industry. The gender composition in transport equipment has changed little during 1986-2001 period.

67. Although women were significantly more affected than males by the reduction in hours worked in the clothing industry, female hours worked across the total economy rose substantially to nearly 40 per cent of all hours worked in 2001 compared with 35 per cent in 1986.²⁰ This more than offset the losses in the clothing industry.

68. Across the three industries, no one household type or income decile group was particularly more affected than any other.

Textiles, Clothing, Footwear and Carpet Industries

69. The TCFC industries have traditionally been the industries most sheltered from pressures to adapt to import competition. They have consequently been the most affected by tariff reduction. Employment, for instance, has more than halved in the clothing, knitting and footwear industries since 1987. Many firms have closed down, particularly those competing in more "basic line" product areas. However, those companies operating in niche markets and those manufacturing more "up market" fashion garments have been less affected by competition from increased apparel imports. Many companies have transformed their business by moving up the value chain through developing specialised products. Tariff reduction and associated import competition has driven this transformation. In addition a large number of significant new players have entered the market and focussed on developing niche markets.

70. The high labour intensive nature of the TCFC industries, in particular clothing and footwear, has meant that they have been particularly susceptible to imports from developing countries which have a substantial labour cost advantage. Consequently, few, if any, New Zealand TCFC firms have been able to compete on price with imported product from low cost Asian countries. TCFC firms have, therefore, concentrated on service by providing for small runs, fast turnaround, just-in-time delivery, as well as the quality, design and fit of the product. These strategies have built on the areas of natural protection available to New Zealand firms - distance from competitors, small scale of demand and cultural and market specific factors.

71. New firms have emerged in some segments of the apparel industry including mid and high-end women's fashion, swimwear, outdoor, sports and leisurewear and some childrenswear and infantswear. A number of these firms have significant export earnings. Several textile and apparel firms have focussed on the development of new products based on merino wool.

72. Exports have grown considerably across the TCFC industries. In 2001 exports were $56 million for textiles, $74 million for carpet yarn, $98 million for carpet, $222 million for clothing (in 1989 exports were $29 million) and $60 million for footwear (in 1989 exports were $10 million). Thirty-four per cent of clothing exports and 18 per cent of footwear exports were re-exports.

73. Case study research undertaken for the Review found that during the early stages of tariff reduction, textile, clothing and footwear firms focussed primarily on survival. Their focus was short-term. In many cases businesses shed employment as product lines were abandoned and activities, particularly in clothing, were outsourced. Following the initial sharp adjustment period, firms have steadily built relationships and contracts with other players in the industry, both in New Zealand and internationally, and put together new supply chains. Not all remaining firms, however, have developed deeper strategies. There are still many firms that remain subsistence businesses with few prospects for future growth. It appears that many survive by paying employees low wages.

74. A strongly held view in the TCFC industries is that the infrastructure required to sustain growing companies has declined as the level of domestic production has shrunk. In the clothing industry, for example, the lack of qualified machinists and technicians was often identified as a constraint to growth. The decline in domestic firms producing textiles and accessories for apparel companies was also cited as a concern in relation to meeting the CERROO criteria where the use of imported fabric makes it more difficult for garments to qualify for preference under the 50 per cent area content threshold.

75. The loss of infrastructure has been a predictable outcome of the steady reduction in domestic manufacturing. Segmentation and specialisation have, however, helped slow, and in some cases halt, the decline of local infrastructure. Where appropriate, firms have turned to imports for key components. The increasing ease with which product can be sourced from overseas suppliers means that imports have become a cost-effective substitute.

Motor Vehicle and Automotive Component Industry

76. The automotive component industry (and the motor vehicle industry until 1998)²¹ has received higher levels of tariff protection than other manufacturing industries - except for the TCFC industries. In the early 1980s, New Zealand had nine vehicle assembly firms operating 15 plants. In 1998 the four remaining plants ceased local production. While many suppliers to the assembly industry closed down, a sizeable number of firms involved in the manufacture of automotive components maintained sales of replacement parts to the New Zealand market, diversified and/or found export markets for their products.

77. Most of the remaining automotive component manufacturers are overseas companies using international brands and appear to be very efficient at producing low volume, short-run product lines. Exports have risen sharply for this group in recent years, reaching $242 million in the June year 2002.²² Exports tend to be in specialised niche markets including alloy wheels, tyres and automotive lighting. A significant proportion of these exports is within firms with the New Zealand subsidiary selling to associate overseas operations.

3.3 Firm Level

78. Tariff reduction has been a significant factor in the decline and transformation of many previously highly protected manufacturing firms. The reduction in tariffs, however, was not the only change in the economic environment facing businesses. One of the most dramatic changes was the sharp decline in inflation from 9.8 per cent during the 1980s to just 1.7 per cent in the 1990s (Infometrics).

79. Case study research found that at the firm level, while lowering input costs, the direct effect of tariff reduction was to squeeze margins. This forced many firms to either accept the lower margins or adjust their business model, in some cases significantly, to become more competitive in their own right.

80. Typical adjustment strategies adopted by firms in response to tariff reduction were:

• rationalisation to reduce costs including through contracting work out both to New Zealand firms and to factories offshore - a move towards a more virtual business model. This has been most apparent in the apparel industry;
• narrowing the range of products manufactured while at the same time increasing the product range by importing;
• developing innovative, internationally competitive products and seeking new export markets;
• becoming more adaptable to change and technically efficient; and
• increasing the emphasis on marketing and branding.

81. The responses and strategies above demonstrate that tariff reduction led to increased productivity and innovation at the firm level. According to a study by Campbell-Hunt and Corbett (cited in Galt 2000), in 1989 a quarter of New Zealand manufacturing plants were within four years of world best practice given equipment upgrades. In 1996 three-quarters of manufacturing plants were within four years of world best practice given equipment upgrades.

3.4 Summary

• Previous tariff reduction lowered cost structures and resulted in firms becoming more efficient. Successful firms made significant productivity gains through innovation. This resulted in the development of more specialised, internationally competitive products. At the firm level, there was evidence that a number of companies, particularly in the apparel industry, moved towards a more "virtual" business model.
• It was difficult to isolate the effect that tariff reduction had on the economy overall. The benefits of tariff reduction were widely dispersed and have offset the costs which were concentrated in certain industries. The Infometrics study showed, under static analysis, that reducing tariffs from 1986/1987 levels to current levels was responsible for a 0.3 per cent increase in GDP. This equated to around $414 million in 1995/1996 prices, or about $300 per household.
• The dynamic gains associated with previous tariff reduction were significant and may have been much larger than the static gains. These gains relate to improved consumer welfare through improved product quality, service and variety, increased firm-level and industry-level innovation and productivity, and increased technology uptake by firms.
• Tariff reduction increased consumer purchasing power through lowering prices. Low income earners benefited the most. Consumers also benefited from increased variety and improved quality and service.
• There were sharp employment effects between 1986 and 1991. Total employment in the economy increased since 1992 primarily due to growth in the services sector. Labour moved to more productive areas of the economy, although it was not possible to categorically state the extent to which displaced workers found alternative employment.
• Tariff reduction contributed to the downsizing of the traditionally highly protected clothing, footwear and transport equipment industries. This disproportionately affected Asian, Pacific peoples and women. Employment in several regions has not yet recovered to employment levels of the mid 1980s. There appears to still be some remaining employment effects for Pacific peoples and Asians.

⁶The tariff rates shown should be treated as indicative rather than precise and do not include specific tariffs. The rates shown are those at 1 July.

⁷In other words, had the tariff regime which prevailed in 1986/1987 still existed, the gain in 2009/2010 from reducing tariffs from their 1986/1987 levels to their current rates would be 0.3 per cent of GDP. Infometrics noted that this figure is likely to be an underestimate of the effects of previous tariff reduction as 1995/1996 inter-industry data (which already incorporates some of the effects modelled) was used.

⁸Four per cent is the agriculture sector's Total Factor Productivity average annual growth rate over the period 1985-1998 (from Federated Farmers' submission).

⁹1998 prices.

¹⁰Another key factor in improved consumer choice and the quality of goods and services available included the removal of quantitative restrictions on imports, primarily by way of import licensing.

¹¹These figures are expressed in 1995/1996 prices.

¹²HS 39. Plastics New Zealand estimates indirect exports at an additional $80-100 million.

¹³HS 73-83.

¹⁴Other Food & Beverages, National Accounts, March years.

¹⁵The export data classifications used by Infometrics were: HS 57-64 for TCF; HS 73-83 for metals; Other food & beverages, National Accounts for food products; and HS 87 for automotive components.

¹⁶ANZSIC C281 (motor vehicle and part manufacturing) and C282 (shipbuilding, boatbuilding, railway equipment manufacturing and aircraft manufacturing).

¹⁷Comparing weekly hours worked in 1986 with weekly hours worked in 2001, employment increased in Manawatu, Palmerston North, Masterton, Carterton, South Wairarapa, Kapati Coast and Wellington City, but decreased in Wanganui, Rangitikei, Tararua, Horowhenua, Upper Hutt, Lower Hutt and Porirua.

¹⁸Income deciles 3, 9 and 10 showed small decreases.

¹⁹Derived from Table 2.11 of the Infometrics report.

²⁰Derived from Table 2.15 of the Infometrics report.

²¹Tariffs on motor homes and ambulances were to reduce from 17.5 per cent to zero on 1 December 2000 in accordance with the motor vehicle industry tariff announcement of 1998. The tariff freeze, however, means that tariffs on these two products remain at 17.5 per cent.

²²See Footnote 53.