Editorial: Trade deficits still matter, but less than they once did

Finance Minister Grant Robertson. Photo / Mark Mitchell

COMMENT: There was a time when New Zealand worried about its external accounts much more than it does now. The news this week that the January trade deficit was the highest on record, twice the deficit expected, would have caused alarm at any time up to March 1985. The government would be talking austerity, telling us we had to tighten our belts and it would set about raising tariffs and restricting import licensing in an attempt to live within our means.

That calculation ceased virtually overnight on March 4 1985. That was the day the dollar was floated. The immediate worry in the days following was that the Kiwi would not so much float as sink under the weight of the country's chronic balance of payments deficits. But to the surprise of many — though not those who made the decision — it floated quite well and continues to do so, enabling the country to import a higher value of goods than it exports.

Elementary economics says the dollar's exchange rate should float at a level that balances the value of exports and imports but because international currency flows vastly exceed trade payments, elementary economics does not apply. The exchange rate, we quickly learned, reflects the confidence of international finance markets in the management of the economy behind the currency.

Trade balances matter less than the government's internal budget balance and the public sector debt matters more than the total national debt. So need we worry at all about the latest trade deficit? Yes, because trade is still among the indicators of an economy's strength. It would be reckless to imagine the value of the dollar has lost all connection to the trade balance.

In the year to January 31 the value of New Zealand exports fell 7.8 per cent while the value of imports hardly changed, despite the rise in oil prices. The export picture is mixed. Milk powder, butter and cheese were all up, especially in sales to China; while beef and lamb were down. Exports of lamb to the EU fell to their lowest since 2006, the year with the previous record trade deficit.

The EU is our largest customer for red meat. When Britain entered the European Community in 1973, New Zealand managed to negotiate special access for beef and sheepmeat in quotas that are enshrined in the EU's World Trade Organisation schedule.

Four weeks from today Britain is due to leave the EU and time is running out for Theresa May's hopes of preserving a customs union. If there is no deal by March 29, New Zealand's meat exports to the EU and the UK will be under general WTO tariffs and quotas for those products.

But our exporters have found many more markets than they had in 1973. According to Statistics NZ, this "record" trade deficit amounts to just 9 per cent of two-way trade, the 2006 deficit was 17 per cent. That is a reflection of how much this country has been expanding its exports for many years. The trade balance is not as crucial as it was, but it still matters.