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Why Protect Local Industry?

What are some of the basic arguments put forward to explain the need for rapid industrial development in New Zealand? Many people think that 'because of its excessive and unique vulnerability, New Zealand's urgent and essential priority is to reduce heavily its dependence on imports and its narrow range of exports'.¹ New Zealand's manufacturing industries depend heavily on imported raw materials and capital equipment for their continued operation and a deterioration in the terms of trade is likely to reduce our ability to import these goods.

It might be suggested, however, that New Zealand's main concern is not with short term fluctuations in export proceeds. These are a necessary condition which New Zealand must accept following the basing of her economy on the production of those commodities which give the highest return per unit of factor input. The major concern must be with the long-run failure of exports to grow in volume at the same rate as imports. In the post-war period the demand for imports as a percentage of the national income has been relatively stable, but export receipts have been inadequate to meet import demands.² Perhaps the most important reasons for this are that inflation and protection of local industry have diverted labour and capital away from the export sector.

A good case can usually be made out for protection of local industry when the price and quality advantage of imports is due to overseas countries indulging in dumping or export subsidization. Again, protection can reasonably be extended if low cost imports are causing disruption of local industry to the extent of creating unemployment which cannot be absorbed in other sectors of the economy. However, this latter type of protection should be of a temporary nature only, extended until the idle factors of production can be absorbed in other, more competitive lines.

Full employment can be ensured in the short run by heavily protecting local industry, but in the long run such action tends to weaken New Zealand's ability to employ her population fully because the tendency is for factors of production to be diverted away from industries capable of earning foreign exchange or able to hold their own in competition with imported goods. New Zealand's industrial development is likely to continue to depend heavily on imported producer goods, while the growing population will demand larger quantities of essential consumer goods of the type impossible to produce economically domestically.

The manufacturing interests are usually basically opposed to any movement directed towards diminishing the degree of protection accorded to local industry, particularly if these reductions are made on a multilateral basis. Their major objection is that they cannot compete with the exports of low cost countries, particularly those with low standards of living. But wages are only one cause of low costs; technical ability, capital equipment and institutional settings are also of fundamental importance.

Given all these facts it is still true that it is eminently desirable for New Zealand to develop a sound industrial base in order to assist in the development of a balanced economy. How is this best achieved?