Jamie Whyte: The naked truth about barriers to foreign trade

Foreign trade can give both New Zealand and Canada more butter and maple syrup. Photo / Getty Images

It's best if all parties lay it bare at the same time.

The Trans-Pacific Partnership (TPP) free trade deal is still being negotiated. How it will turn out remains unclear. But the negotiations have revealed one thing. Most commentators do not understand the benefits of trade.

Their confusion can be seen in the common lament that New Zealand may get little in return for having already eliminated almost all import tariffs and export subsidies. As Herald columnist Toby Manhire put it, New Zealand is "playing strip poker naked".

The metaphor is funny but befuddled. In strip poker, you win by getting naked last. In trade deals, the best outcome for each party is everyone getting naked together: that is, all countries eliminating all tariffs and subsidies.

But here is what most commentators seem to misunderstand about trade poker: even if the others keep their clothes on, you are still better off getting naked. New Zealand doesn't need something "in return" for having taken down all our trade barriers. We benefit from it even if other countries keep their barriers up.

To keep matters manageably simple, suppose it costs a Kiwi farmer $1 to produce a litre of milk and it costs a Canadian farmer $2. And suppose the matter is reversed with maple syrup: while it costs a Canadian farmer $1 to produce 100g, it costs a Kiwi farmer $2. Without trade barriers, Canadians will buy New Zealand-made milk and we will buy Canadian-made maple syrup.

To protect Canadian dairy farmers, the Canadian government imposes an import tariff of 200 per cent on milk imports from New Zealand (again, let's suppose for simplicity), which pushes the cost of Kiwi milk up to $3. That is nice for Canadian dairy farmers. But it is nasty for Canadian milk drinkers, who must pay a dollar more. It is also bad for Canadian maple syrup makers. Some of that extra dollar now being spent on milk would have been spent on maple syrup. Indeed, it is bad for every Canadian business except dairy farmers, since it reduces the money milk drinkers have left to spend on other stuff.

Altogether, Canadians must be worse off. The tariff diverts some of their consumption from something efficiently produced to an inefficiently produced substitute. Which means they must consume less altogether.

It should be obvious now why the New Zealand Government would be foolish to retaliate by imposing a 200 per cent tariff on Canadian maple syrup. By diverting some of our consumption to inefficiently produced maple syrup, it would mean we consumed less altogether. And it would harm the very Kiwis injured by Canada's milk import tariffs: namely dairy farmers.

Some of the extra dollars we are now spending on maple syrup would otherwise have bought milk. Hurting yourself is a strange kind of retaliation.

The matter is even more obvious when foreign governments subsidise their exporters. Suppose that, instead of taxing dairy imports from New Zealand, the Canadian government subsidised Canadian milk production to the tune of $1.50 a litre. This would allow Canadian dairy farmers to sell their milk for 50c a litre, beating Kiwi farmers there and here.

That would be tough for Kiwi dairy farmers but great for Kiwi milk drinkers. It would amount to a massive gift from Canadian taxpayers to Kiwi milk drinkers, and to all the businesses on which we spend the money we have saved on milk.

Since when is it sensible to "retaliate" against those sending you gifts?

The basic error that underlies much discussion of international trade is the idea that exports are good and imports bad. And, thus, that removing barriers to imports is a price we pay in the expectation that other governments will remove barriers to our exports.

This gets things exactly the wrong way around. Consumption is the purpose of production. Foreigners consume what we export. We consume what we import. If we export more than we import, we consume less than the value of what we produce. Of course, if you export more than you import, you build up a store of foreigners' money. But the only point of holding money is that you plan to spend it: money is only worth what it can buy.

In other words, the only point of selling things to foreigners is gaining the ability to buy their stuff. Exports are the price we pay for imports.

In the Herald on Friday, Peter Lyons claimed the purpose of trade barriers in the US is to encourage investment in businesses that provide a decent return on capital - unlike agriculture, according to Lyons. That is implausible. Since when did capitalists need governmental coercion to invest in high-return businesses? The real purpose of trade barriers is to do favours for politically influential domestic businesses.

That is why, contrary to Lyons' claim, US agriculture is the biggest beneficiary of trade barriers. All states have two representatives in the senate regardless of population, giving their farmers disproportionate influence in politics.

A return to New Zealand's pre-Roger Douglas protectionist policies would not cause a boom in high-return investment.

It would unleash an orgy of special pleading and cronyism. No matter how much protectionist clothing the other players at the trade poker table choose to wear, we should remain naked. The difference is their loss, not ours.

• Jamie Whyte is a former leader of the Act Party.

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