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Salient. Victoria University of Wellington Student's Newspaper. Volume 31, Number 6. April 9, 1968

Import Licensing Versus Tariffs

Import Licensing Versus Tariffs

By A Public Servant

The latest figures for overseas exchange transactions published by the Reserve Bank should scotch once and for all the argument (advanced frequently by people who should know better) that there is no connection between the internal and external economies.

It is pretty obvious from the figures to the end of February that the Government's internal deflationary policies are paying off in the way they were intended to —by a distinct improvement in the balance of payments.

For the year ended February 1968, the current account deficit on cash transactions through the banking system has fallen from a mammoth $100 million to a still unduly large but vastly improved $45 million. The salient feature of this improvement is the decline of more than $100 million in overall import payments for the year.

This can be directly attributed to the scries of measures, culminating in devaluation last November, introduced by the Government over the last twelve months to clamp down on activity in the internal economy.

The success of Government policy will also bolster the arguments of New Zealand's economic radicals who want to replace the existing system of partial quantitative control over imports with a comprehensive tariff stricture. These controls at present cover some 60 per cent of the value of New Zealand's imported goods.

One of the arguments advanced by economic orthodoxy in favour of the licensing system is that it is a useful weapon in defence of the balance of payments: this appeals to people who believe that the best way to stop people buying imports is, well, to stop them buying imports—rather than by restraining overall expenditure, as has been done with marked success over the last few months. It may seem peculiar to describe the tariff advocate as a radical—but New Zealand's mercantilist policies of protetion since the 1930's certainly qualify him as a critic of the conventional wisdom.

The tariff argument can be seen in its most protean form in the views advanced from time to time by Lincoln's Professor Philpott: you set a flat tariff over all of New Zealand industry—high enough to reflect the extra social value you place on earning, or saving, foreign exchange —and if an industry cannot survive with this price protection, you let it go to the wall and use the resources more efficiently elsewhere.

More sophisticated forms of the Philpott thesis incorporate different levels of tariff for different industrial sectors, to allow some extra protection For favoured young industries, or to fit in with regional manufacturing agreements.

This view would have the private support of a Wide range of Government economists—with the notable exception of the Industries and Commerce Department, whose empire would suffer considerably if it did not have import licensing to administer. Support could also be expected from some manufacturers, some elements in both National and Labour parlies, and—with the public and vocal exceptions of Dr. W. B. Sutch and Mr. W Rosenberg of Canterbury University—perhaps the majority of New Zealand's professional economists.

Behind the differing opinions are some mights guesses about what de-restriction of imports might do to New Zealand's ecomomy and, possibly more basically, differing social philosophies about the proper course for New Zealand's future economic and social development.

Those in favour of de-restriction argue that now we have a modest industrial base, admittedly stimulated by quantitative protection, we need a basis for selecting future high-growth industries which does not depend upon administrative decision.

Some of the supporters also probably believe that our future lies in regional trading arrangements—that economic autarchy for New Zealand is a pipe-dream, and that we will never reduce our overseas trade to a significantly lower portion of our national income.

The opposing view is more subtle, but in its way appealing to nationalist sentiment. Behind Dr. Sutch's economic views, for example, is the belief that New Zealand has its own unique destiny, and that it should maintain and develop an economic system which will permit it to follow this destiny without succumbing to the inhibiting pressures of the outside world.

Dr. Sutch argues that import control is essential to the preservation of full employment which, he says, has had a profound and on the whole benign influence on this secure and egalitarian society. Those in favour of import control argue also that we can have growth behind the wall, and that this basically depends upon broadening the base of our growth so that we are no longer Subject to the vagaries of fluctuations in prices for a few major pastoral exports.

Those on the other side of the fence would agree whole-heartedly that we should expand our industrial base. But they argue that there is an economic limit beyond which industrialisation can only be achieved at the cost of more profitable opportunities elsewhere. They would also maintain that import control has relied upon industrial development to substitute for imports on the domestic market, rather than to provide new export opportunities. World markets would enable larger sales which could be produced at lower unit cost.

So far import protection has if anything increased our dependence on primary export earnings to maintain a reasonable rate of economic growth.

The composition of imports has shifted steadily toward raw materials and capital goods: a major effort to reimpose comprehensive licensing in an effort to restrict the growth in imports would mostly affect those imports which we add value to in New Zealand—and would thus have a profound effect on production and employment in this country.

Those of the restrictionists who concede that internal demand does affect the balance of payments would argue that without quantitative controls you have to reduce internal demand to such a level that you drive people out of work.

In theory, of course, a tariff-based system could provide the Same protection as import licensing—but the point is that it shouldn't. Tariff supporters would argue that the present stringent measures are due to exceptional circumstances, and that it is quite possible to maintain full employment without import controls it you have a reasonable level of overseas currency reserves to buffer you against short-term external fluctuations.

Recently the Monetary and Economic Council has reached the view that a better balance in the labour market can be achieved with a reasonable policy of job relocation, short-term in-job training etc. on the Swedish model.

However the controls-tariffs argument is resolved, we are unlikely to maintain the present half-pied system in its present state.

Both the Prime Minister, Mr. K. Holyoake, and the deputy Prime Minister Mr. J. Marshall, have recently reassured manufacturers that the Government will not pursue a policy of de-restriction which will harm New Zealand manufacturing. But tariff advocates willingly concede that this is just what a tariff system should do—hurt inefficient manufacturers so that the resources they are awarded by the import licensing system can be more productively used elsewhere by firms with greater profit potential.

The Government is obviously unwilling to put it quite this way, but there are mounting pressures on it to decide just what framework it wants for New Zealand's development: and in making decisions of this sort it cannot avoid considering the pros and cons of the great but rather muffled, debate.