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[Released under the Official Information Act]

• 3.1 Introduction
• 3.2 Results: Questions 1-16
• 3.3 Results: Questions 17-22
• 3.4 Summary
• Copy of Questionnaire

3.1 Introduction

The previous section looked for evidence of the importance of past tariff changes on patterns of employment - by industry, region, ethnicity and gender. The overall conclusion was that with a few exceptions, tariff reform had a relatively minor effect on employment changes. In this section we take the perspective forward and look at how firms currently assess tariffs and further tariff reform in relation to other factors which may affect future business performance.

A postal survey was sent out to 400 companies selected from the Universal Business Directories' database. Selection was random, but stratified by industry so as to obtain companies for whom tariffs are potentially important. In total 271 useable responses were received by the close-off date. Ten companies could not be traced and 22 were later discovered to be ineligible. Thus the effective response rate was 73.6%.

The full purpose of the survey was to seek companies' views on the importance of tariffs in relation to a collection of other factors which might affect performance. These factors included both macroeconomic variables such as corporate tax rates, and company specific variables such as the importance of a brand. Some questions were also asked about how various aspects of the business might look in 2007 under two scenarios - no change in tariffs and complete abolition of tariffs.

3.2 Results: Questions 1-16

Questions 1-16 of the survey sought respondents' views on a number of issues which might affect their business. The results are summarised in Table 3.2. The full questionnaire is shown after section 3.3.

With questions such as these it is difficult to obtain a robust quantitative measure of the relative importance of the various issues. An attempt at this is given in the lower half of Table 3.2 which shows the rank of each issue in terms of the percentage of respondent who either "strongly agreed" or "agreed." Note that Question 16 has not been included in this ranking as it relates more to behaviour than opinion. Also, because Question 12 is written in the negative we have reversed the responses.

Tariff related issues are not amongst the leading concerns of business. Tariffs on competing imports rank 8th out of 15, the effect of uncertainty about future tariffs on capital spending ranks 14th, whilst tariffs on inputs are last on the list. The top four issues comprise two firm specific ones - a wide product range and brand recognition, and two macroeconomic ones - access to skilled labour and the company tax rate.

Another way of assigning importance is to score the five response categories. The obvious choices for a weighting scheme are a linear scale {2,1,0,-1,-2}, or a nonlinear scale which gives more weight to the extreme responses such as {10,3,0, -3, -10}. A nonlinear scale which gives less weight to the extreme responses is also a possibility, but seems improbable. The lower half of Table 3.2 shows the scores and associated ranks under the two hypothesised weighting schemes.

Clearly the difference between the linear and nonlinear weighting system is negligible. Also the results align closely with the "agreement" ranking. Tariff protection on competing imports ranks 7th, tariff uncertainty is 12th or 13th and tariffs on inputs remains at 15th. Access to skilled labour, tax rates, and brand recognition are still in the top four issues along with interest rates - instead of product range. Some caution is required here, however, as the question about interest rates is in the context of ability to invest. Agreement that interest rates affect investment does not necessarily mean that interest rates are important in a wider context.

Figure 3.1: Rank of Issues v Score of Issues

Figure 3.1 shows that the relationship between the rank and the score (using the nonlinear weighting scheme) is approximately linear. This means for example that the ranking of "tariffs on competing imports" as 8th out of 15, really does mean that respondents give it medium importance. Had the relationship been concave for example, it would have indicated relatively small differences in importance between the higher ranked issues, but large differences between the lower ranked issues.

The final column in Table 3.2 and also Figure 3.2 show how the response to the question on tariff protection (Q9) is correlated with the response to the other questions. Not surprisingly, Question 10 on uncertainty about future tariffs exhibits the highest correlation. Next most correlated are the relative degree of competition from imports followed by interest rates. These results tell a consistent story; that firms which compete with imports see tariff protection as an important enough issue for uncertainty about future levels of protection to have a significant effect on their investment plans. Investment plans are also sensitive to interest costs.

Figure 3.2: Correlation with Question 9

Interestingly, the issues which are least correlated with tariff protection add colour to the story. Firms for which tariff protection is important see labour costs as a problem.⁷ Reflecting this emphasis on labour, such firms argue that having the latest plant and equipment would not significantly cut production costs. And these firms are not high-tech businesses. Nevertheless they see themselves as spending as much on research and development as their competitors - which of course tells us nothing about relative research and development expenditure in the whole industry.

One apparent contradiction in this picture is that these low-tech, tariff-dependent firms said that they do not compete mainly on price.⁸ This might mean that margins are too tight for firms to even contemplate lowering prices to increase demand, which would be consistent with a constant emphasis on reducing labour and capital costs.

3.3 Results: Questions 17-22

Questions 17-22 are primarily concerned with asking about future levels of activity with and without tariffs. The main results are summarised in Table 3.1.

Table 3.1: Two Scenarios for 2007

The first point to note about these results is that the underlying distributions are evidently very skewed, with the means being considerably above the medians. Nevertheless the two sets of figures depict a reasonably consistent picture:

• Turnover is expected to rise over the period to 2007, with suggestions of a greater increase if tariffs are abolished.
• The higher output under free trade is associated with lower employment, perhaps indicating that lower protection is a spur to higher labour productivity.
• An increasing share of output is expected to be exported by 2007, although there are conflicting indications on whether this shift would be affected by tariff changes.
• Raw material imports as a proportion of total costs are expected to rise slightly over the next five years, but again there is no clear relationship with tariffs.
• In contrast there is a clear trend to importing and on-selling more finished goods, especially if tariffs are removed. This is consistent with lower employment per unit of sales - refer point 2 above.

Overall we infer that firms expect to increase turnover by about 30% over the next five years, with more of this coming from imported final products if tariffs are removed. This would displace local production and thus cause slower employment growth - in these firms.

3.4 Summary

The results of the survey provide wider confirmation of the inferences drawn from the case studies. Most notably, tariffs are not a major issue for many companies, although there are exceptions. This is particularly true for companies which either are or have become less labour intensive, more export oriented, and more innovative in terms of product development, sourcing of materials and production processes.

Table 3.2: Results of Postal Survey (Questions 1-16)

Copy of Questionnaire

Decision Research Limited

Effects of Tariffs in New Zealand: May 2002

The centre and right-hand columns are for your best guess as to what the position will be five years from now with and without tariff protection.

⁷This is simply the converse of the result that firms who think labour costs are not a problem tend not to be those for whom tariffs are important.

⁸That is, firms which do compete mainly on price tend not to be those for which tariffs are important.