Beyond The Intelligence of Two Planks

Gareth MorganEconomics

Gareth Morgan, Director of Gareth Morgan Investments

NZ sawmillers are having to pay more for their logs because of a rise in export prices. According to some this is the epitome of injustice threatening the existence of NZ-based processors. The Japanese are “unfairly” paying too much since Japanese processors are protected by tariffs on imports of processed wood products.

The Japanese tariffs enable their log importers to pay higher prices for raw material – since they can capture higher sale prices for manufactured product in their home market. But an importer would only pay higher prices if he has to – that is if tightening global supply requires it. The tariff simply raises their ability to pay. To the extent higher prices are occurring the NZ log seller gets the benefit of the tariffs directly. Only if there is no shortage of supply of logs in world markets will the Japanese manufacturer be able to keep the tariff profits to himself. In that case there are excess profits to be made by owning processing facilities in Japan – an internationalisation opportunity New Zealanders via part ownership of Japanese mills, could exploit.

But we know world log prices are being bid up – to the benefit of our log producers. The real pressure on log prices then must be limited world supply – not Japanese tariffs. This point seems to have escaped those blaming wicked Japanese tariffs for our domestic sawmillers’ plight.

That additional processing doesn’t occur in NZ isn’t necessarily detrimental, from a national economic perspective – and that’s all that matters here. What NZ requires if it’s to provide a sustained boost in jobs is income. For income to be accrued in the international trading arena it has to be earned. Being earned requires being competitive despite or even because of barriers erected against you. So long as the purchaser prefers your product ahead of your competitors that income can be captured – even if it involves investment in processing facilities behind the protective barriers.

If NZ forest owners are able to earn more by exporting logs than selling them to NZ sawmills then they should. If it’s true also that greater income can be earned by processing in Japan, courtesy of Japanese tariffs, then it’s rational for budding sawmillers to purchase capacity there. The income they earn by owning such an asset is an income to a New Zealander to be spent, at least in part, here. The jobs created here wouldn’t be in the sawmilling industry but so what?

Wayne Coffey’s threat to import logs from Chile tells us Chilean log producers are as thick as two planks since they haven’t offered their cheaper logs to Japan already. Peter Harris’ call for the government to take a “leadership” role exposes how dated his economic analysis has become – tit for tat protectionism has never increased economic welfare. And the Remanufacturers Association’s observation that higher export prices are driving up the prices of those logs domestically consumed suggests log producers have other buyers ready to pay the higher price. The lobby’s case looks loopy.

Beyond The Intelligence of Two Planks was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.