4. Projected Impacts of Further Tariff Reduction
82. Infometrics was commissioned to undertake general equilibrium modelling analysis on the effects of removing tariffs after 2005. Given that the simple average MFN tariff rate is now low at 3.7 per cent23 a zero-tariff end point was the most appropriate scenario to model. The GE modelling estimated the static impacts on the economy of removing tariffs in 2010 by comparing prices, output, consumption, investment, exports and imports under zero tariffs by 2010, to maintaining the freeze until 2010. The following outlines the key findings of the Infometrics report as well as employment data and information received through the consultation process.
4.1 Macroeconomic Impacts
83. At a macroeconomic level, the modelling suggested that moving from the current tariff regime to free trade by 2010 would generate a small, but not insignificant, gain in welfare. Under static analysis, removal of tariffs by 2010 would cause GDP to rise by 0.1 per cent or around $135 million.24 This gain would be relatively smaller than the previous gains from tariff reduction.
84. Removal of tariffs by 2010 would lead to lower prices throughout the economy with the GDP deflator projected to fall by one half of a per cent. This would improve international competitiveness with a rise in exports by around 0.7 per cent or around $325 million.25 The increment in private consumption at the macroeconomic level would be imperceptible.
85. The static gains as estimated by Infometrics above, do not include the dynamic benefits of tariff reduction which are likely to be more significant than the static gains. These dynamic benefits will include further productivity gains, increased choice and quality of consumer goods and increased pressure on firms to innovate and become more internationally competitive.
4.2 Industry Impacts
86. The industries which would incur the greatest losses in output under the comparative static analysis with no tariffs by 2010 are clothing and footwear. They would experience reductions in output of about 8 per cent. That is, clothing and footwear output in 2010 would be 8 per cent less than what it would be if the tariff freeze was extended until 2010. Their domestic market share is projected to fall by 17 and 22 per cent respectively while exports would rise 1.0 and 1.1 per cent respectively when compared to extending the tariff freeze until 2010.
87. For other industries there is projected to be no change in gross output which exceeds 1 per cent - either positive or negative. Small gains would accrue to industries such as wood and paper products, dairy and meat processing, base metals and machinery and equipment, while small losses would be incurred by other manufacturing (which includes furniture manufacturing), rubber and plastics.
88. The GE analysis modelled the effects of tariff changes on groups of industries based on the ANZSIC 3-digit sub-industries. As a result there may be sub-industries (or particular firms) that may be affected adversely by tariff removal which are not picked up in the modelling analysis. This is because these sub-industries are, in effect, hidden within their wider industry grouping. Consultation and case studies indicated those sub-industries that are likely to be affected by tariff removal.
89. One group may be the automotive component industry which has tariffs of 10-11.5 per cent. Case study research indicated that a number of firms in this industry are very price sensitive. There was significant interest in future tariff policy from this group. Industries with 5-7.5 per cent tariffs who expressed concern about further tariff reduction were the furniture, building products ([Text deleted due to confidentiality]), heavy engineering and flexible packaging (plastics) industries. These groups indicated that the tariff regime is important in maintaining market share and that further tariff reduction would risk the future viability of their industries.
4.3 Firm Level Impacts
90. Aside from those firms in the industries mentioned above, several large firms indicated that they were vulnerable to further tariff reduction - notwithstanding the relatively low level of tariff protection (between 5-7.5 per cent) they attract. These firms included some of relatively key importance to New Zealand's manufacturing infrastructure.
91. A common argument among these large firms is that they are already operating at world class levels and that further efficiency gains will be difficult to achieve. Efficiency gains were more straightforward to achieve under previous tariff reduction programmes, particularly in the late 1980s and early 1990s, as the focus was on cost cutting. Responding to removal of the remaining 5-7.5 per cent, however, would be comparatively more difficult, particularly for those firms competing in price sensitive markets. They argue that the development of new products and technologies, and the development and expansion of new export markets will take a number of years. Extracting further productivity gains would therefore require appropriate adjustment periods.
92. All firms argued strongly that certainty in respect of the post-2005 tariff regime was critical to making efficient future investment decisions. The impacts of further tariff reduction will be reduced if government establishes a clear and certain path on post-2005 tariff policy.
4.4 Employment Impacts
Total Manufacturing
93. The employment characteristics of the manufacturing sector are somewhat different to the characteristics of the economy in general:
- 28 per cent of manufacturing employees have no qualifications compared to 19 per cent for the total economy;
- 8.7 per cent of females are employed in manufacturing compared to 17.2 per cent for males. In other words manufacturing is relatively more important to males than females;
- 22.7 per cent of Pacific peoples,26 15.7 per cent of Māori, 12.2 per cent of Europeans/Pākehā and 12.1 per cent of Asians are employed in manufacturing (see also Table 3). In other words manufacturing is relatively more important to Pacific peoples and Māori.
Clothing and Footwear
94. The two industries clearly affected by tariff removal under the comparative static analysis, clothing and footwear, are projected to see output decline by 8 per cent under zero tariffs by 2010 when compared to maintaining the freeze until 2010. Employment is projected to fall by around 8 per cent equating to a relative employment loss in clothing of 1,080 and a relative loss in footwear of 130. The TCFL27 industries as a whole, under the modelling, incur a comparative employment loss of 1300 with zero tariffs.
95. It is important to note that under both scenarios, i.e. maintaining the freeze until 2010 and removing tariffs by 2010, the modelling predicts that TCFL employment will increase when compared with 2001:
96. The comparative static analysis undertaken by Infometrics predicts that, under both scenarios of extending the freeze until 2010 and removing tariffs by 2010, there will be a relatively significant increase in TCFL employment. The absolute predicted increases of around 8,000-9,000 must be viewed with some caution, however, given the limitations of the GE modelling and in light of the fact that TCFL employment has been declining for more than thirty years. The comparative static analysis is limited in that it does not take into account those other dynamic changes in the domestic and international environment that may impact on TCFL employment, such as the steady erosion of Australian tariff preferences and an increasingly competitive global textile and clothing market. That said, however, an assessment of the relative positions (i.e. the 1300 FTE figure) - which is the strength of the comparative static analysis - provides confidence that employment in TCFL will not be greatly affected by tariff removal. The TCFL industries will continue to adjust to the current and new drivers affecting the industries which may yet see further employment rationalisation independent of the tariff regime.
97. The clothing and footwear industries have some distinct employment characteristics:
- they employ a high proportion of workers with no qualifications - 36 per cent of all employees have no qualifications;
- they employ a majority of female workers at 80 and 56 per cent respectively; and
- compared to Europeans/Pākehā and Māori, Pacific peoples are 2½ times more likely to be employed in clothing and footwear. Asians are more than 3 times more likely to be employed in these industries (see Table 3).
Table 3: TCFC Employment by Ethnicity
| | European | Māori | Pacific Peoples | Asian | Other |
| | % | % | % | % | % |
| Textiles | 73.4 | 9.1 | 9.9 | 6.5 | 1.1 |
| Clothing | 68.2 | 8.2 | 8.1 | 14.4 | 1.1 |
| Footwear | 59.5 | 10.1 | 20.6 | 8.6 | 1.2 |
| All manufacturing | 75.2 | 12.4 | 7.5 | 4.6 | 0.4 |
| Total economy | 80.1 | 10.3 | 4.3 | 4.9 | 0.5 |
Source: March 2001 Census of Population and Dwellings
98. Table 4: shows a regional breakdown of TCFC employment. The table shows that over half of all clothing and footwear employment is in Auckland and Canterbury. Clothing and footwear is a significant component of manufacturing in Auckland, Canterbury, Wellington and Manawatu-Wanganui.
99. At the TLA level clothing and footwear is most significant to Carterton, Horowhenua, South Wairarapa and Waitakere City where the two industries employ 11.7, 10.7, 10.6 and 8.7 per cent respectively of manufacturing employees (see Table 6:).
Table 4: TCFC Employment by Region
| Region | Textiles | Clothing | Footwear | Percentage of clothing and footwear employment | Clothing and footwear employment as % of manu-facturing employment |
| | | | | % | % |
| Northland | 96 | 132 | 6 | 1.5 | 2.5 |
| Auckland | 2,946 | 3,516 | 459 | 43.6 | 5.4 |
| Waikato | 237 | 537 | 39 | 6.3 | 2.9 |
| Bay of Plenty | 216 | 270 | 3 | 3.0 | 2.1 |
| Gisborne | 96 | 15 | 0 | 0.2 | 0.9 |
| Hawke's Bay | 441 | 207 | 0 | 2.3 | 2.1 |
| Taranaki | 51 | 159 | 3 | 1.8 | 2.4 |
| Manawatu-Wanganui | 990 | 546 | 27 | 6.3 | 4.8 |
| Wellington | 513 | 813 | 51 | 9.5 | 5.0 |
| Tasman | 42 | 39 | 0 | 0.4 | 1.7 |
| Nelson | 81 | 63 | 0 | 0.7 | 2.4 |
| Marlborough | 30 | 42 | 0 | 0.5 | 1.4 |
| West Coast | 6 | 15 | 0 | 0.2 | 1.0 |
| Canterbury | 2,010 | 1,758 | 72 | 20.1 | 5.1 |
| Otago | 732 | 177 | 60 | 2.6 | 2.1 |
| Southland | 126 | 111 | 0 | 1.2 | 1.4 |
| Total | 8,517 | 8,397 | 729 | | |
Source: March 2001 Census of Population and Dwellings
100. Overall, with the possible exception of the four TLAs above, any regional dislocation caused by further tariff reduction is unlikely to be noticeable above the effects of other economic changes that might be expected to occur. Even in the most affected TLAs, the estimated change in the share of TCFL employment in each region is small at less than 1 per cent.28 However, industry impacts will not be spread evenly across regions. Some areas may have very small decreases (or even increases), while others may experience large decreases. The small size of the clothing industry in TLAs such as Carterton and South Wairarapa could mean that the closure of a single operation may lead to reductions in the share of TCFL employment of much more than 1 per cent.
101. There is a risk, therefore, that in several smaller regional areas employment adjustment may be more difficult given the possible lack of alternative employment. This risk is exacerbated by the employment characteristics of the clothing and footwear industries (see paragraph 97).
102. Some submissions from the Horowhenua district noted that Horowhenua would be heavily impacted by any changes to tariff levels because the TCFC industries are a significant employer in the district. They maintained that the district would struggle to achieve its regional economic development strategy growth goals if tariffs were reduced without transitional assistance. The importance of the TCFC industries to Horowhenua is evident in the active Apparel and Textile Industry Cluster Group, facilitated by Enterprise Horowhenua. Thirty-four companies are linked to the cluster group employing 690 full time equivalents.
4.5 Postal Survey
103. The Infometrics postal survey reinforced the comparative static modelling analysis that tariff reduction will have little effect on the economy as a whole. Tariffs were particularly unimportant for those firms that have become less labour intensive, more export oriented and more innovative in terms of product development, sourcing of materials and production processes.
104. Of 15 issues covered in the survey, tariffs on competing imports ranked 8th. The effect of uncertainty about future tariffs on capital spending ranked 14th and tariffs on inputs ranked last. Of much more significance to firms was the company tax rate and access to skilled labour.
105. An important finding was that, for those firms that continue to enjoy tariff protection, certainty about the direction of tariff policy was seen as important to their investment plans.
106. The postal survey also elicited views on projected future levels of activity in scenarios with and without tariffs. Analysis of the results suggests that turnover is expected to rise over the period 2002-2007 with indications of a greater increase if tariffs were removed. The higher output result under zero tariffs is associated with lower employment, perhaps indicating that lower protection is a spur to higher labour productivity.
4.6 Summary
- Tariffs are not a major issue for most companies.
- The GE comparative static modelling undertaken by Infometrics showed that further tariff reduction will have a small, but not insignificant, effect on the economy. It predicts that, in static terms, removal of tariffs by 2010 would cause GDP to rise by 0.1 per cent or $135 million.
- The dynamic gains are likely, from past experience, to be more significant than the quantified static gain of 0.1 per cent of GDP. The dynamic gains are much more difficult to measure directly and include improved productivity, enhanced firm-level innovation, higher rates of capital accumulation and greater consumer welfare through improved product quality, service and variety.
- The GE modelling predicts that the clothing and footwear industries are the only industries likely to be adversely affected to any degree by further tariff reduction. Even in these two industries tariff removal will not cause significant employment changes. It is important to note that the comparative static analysis estimates a lower rate of employment growth as a result of tariff elimination by 2010, not a decline in employment. Changes in the international trading environment, however, could mean that the modelling has overestimated these employment increases.
- The clothing and footwear employment effects on regions are almost certain to be uneven with Horowhenua and Wairarapa likely to be disproportionately affected. In addition, the clothing and footwear industries employ a high proportion of females, Asians, Pacific peoples and unskilled workers.
- Beyond the clothing and footwear industries, consultation has indicated that the automotive component, furniture, building products ([Text deleted due to confidentiality]), heavy engineering and flexible packaging (plastics) industries may be affected adversely by tariff reduction.
- There may also be some large individual firms outside of those industries specifically mentioned that may be impacted on by tariff reduction despite their already having low tariffs. These firms have indicated that it will not be easy to achieve further efficiency/productivity gains. Adequate adjustment periods to allow for investment in innovation and development of new markets will be required.
- The postal survey and consultation pointed to the importance that firms attach to a clear direction on tariff policy to support efficient investment decisions. Impacts of tariff reduction will be minimised if government sends clear signals on the post-2005 tariff regime.
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