The Confusion of “Free” Trade

Gareth MorganEconomics


The success of Fisher and Paykel getting punitive tariffs imposed on whiteware imports from Korea highlights the arbitrariness of so-called "free" trade. All power to F&P for having government take retaliatory action against the dumped goods, no doubt their continuance would have eventually undermined the viability of the local producer.

Goods are deemed as "dumped" when the sale price here is significantly lower than the price of the same goods either in the home Korean market of in other markets the Koreans sell into. In the same way that allowing parallel importing ensures New Zealand consumers can get imported goods at least as cheap as those same goods are sold in other markets, so anti-dumping tariffs ensure New Zealand producers get a fair run at competing in at least their home market. Both instruments are designed to promote fair trade. It seems ironic then that we should be embracing one at the same time we are eschewing the other. But who said we were really interested in fair trade?

But back to the anti-dumping. One of the weaknesses of the WTO rules though is anti-dumping tariffs can only be imposed where there is a local producer threatened. This seems too restrictive. There must be a host of potential business opportunities to supply the domestic market which New Zealand firms could take on if only dumped product from abroad wasn't available from outlets like the Warehouse say.

Then there is the problem of identifying exactly what help a firm gets to enable it to dump product. The WTO rules allow for a country to take retaliatory action if there is evidence of direct subsidy of exports from an "unfair" competitor. Curiously it allows indirect assistance (such as the regulatory protection afforded agricultural producer boards) to go unchallenged. This is a distinction of convenience rather than logic, made simply because it is deemed too difficult to identify all the effects of indirect assistance such as our farmers get. So the WTO rules are limited to curbing only the most direct, unsophisticated export subsidies. Subsidies such as grants for R&D for example, are okay.

It's clear that the labyrinth of conditions which define so-called fair trade by the WTO amount to a sham -of limited logic and the arbitrary result of horse-trading between generations of negotiators. Playing the game within those mainly meaningless rules, becomes the skilful art of international trade.

There is an alternative interpretation of the world of arbitrary trade restrictions – an interpretation that gained currency here in the mid-1980's but which is now loudly and emphatically rejected by the Labour-Alliance government. That interpretation said that every assistance provided to another country's exporters was in effect, a subsidy to the consumers of those products. If the Koreans want to sell their fridges here below cost, then let them – New Zealand consumers would be better off. That logic had an appeal but it was terribly short-sighted – its veracity depending upon the assumption that they would always continue to sell below cost. To the extent that a dumping exporter does so simply to drive competitors out of business and then, having usurped the market share in the target market, was in a position to ramp the prices back up like a monopolist, clearly the targeted consumers would only get a temporary windfall.

This is where parallel importing comes in. Allowing this – admittedly only in cases where effective exclusion of counterfeit product is possible – the ability of the dumper to ramp the prices back up at some future date is severely limited. Indeed only once they have an effective global monopoly could that occur as the target market could always procure alternative supplies at reasonable prices.

Now of course Japan Inc. responded by going for global dominance. It did for a while there, get effective global market dominance in a number of product lines – brown goods and cars to mention a couple. The method used was for the Japanese government to subsidise exporters by taking taxpayer moneys to underwrite cheap loans the exporters get from their banks. This is hardly anything but a subsidy – but okay under WTO rules. The result – the Japanese have always dumped their cars and browngoods in markets like New Zealand. We of course don't have a local producer of either really – although we might if global dumping by the Japanese didn't prevent local firms entering the market.

The cost of that global strategy was initially borne by the target markets who found their manufacturers having to shut down. But eventually it has been the undoing of Japan – although the final chapter on that retreat has yet to be written. It is clear though that Japan has found that it is unable to keep subsidising its exporters. It expected that once it got world dominance it would be able to ramp their prices up but markets being markets the dynamics have meant that there is always a player out there ready to undercut – even it meant going bust eventually too. In Japan's case that was often though not always, Korea. And Korea too is suffering from the weight of having built a corporate sector that fundamentally – once all the funny accounting and government subsidising is stripped away – is just unprofitable.

So the dilemma for free trade proponents is whether to let the Asian-style incidents of heavily protected exporting just play themselves out – demolishing un-subsidised industries in target countries as they rise and eventually fall – or to try and nip that market distortion in the bud. To do the latter requires invoking a set of global trade rules that enable retaliatory action against firms and countries which invoke all such practices – direct like dumping and indirect like central government tax breaks and grants for R&D and exporting, legislative protection of export monopolies, etc.

At present we have a real mish-mash. There is a set of retaliations permitted but these by no means cover the gambit of free trade malpractice that all countries undertake to varying degrees. New Zealand is certainly no angel in this regard although to listen to many in government and within the industries we protect you'd think we were. Such is the hypocrisy of self-interest.

All of which should lead one to conclude that interventions such as the F&P tariff, the producer board protection, and the watering down of parallel importing regulations are really an ad hoc collection of responses to the lobbying of pockets of local self-interest. They may or may not be in the long term interests of all New Zealanders. Some are, some may be and some definitely are not. But whether they are does not determine what measures we as a country, undertake. That is the sole preserve of pressure politics.


The Confusion of “Free” Trade 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.