Trade Policy, Processing and New Zealand Forestry

John Gilbert

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138704404
• eBook ISBN: 9781351785945
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

This title was first published in 2000: Examines core issues with respect to the effect of export restrictions, the impact on processing and welfare, the consequences of foreign ownership of the resource, and the possibility of utilizing export restrictions as a retaliatory strategy against escalating tariff structures. It also examines the impact of liberalization of processed good markets. The book employs a combination of formal general equilibrium modelling and counterfactual simulation using computable general equilibrium (CGE) tecniques, with the New Zealand forestry industry used as a case study throughout. The book makes a contribution to the literature in this field by incorporating foreign ownership into an extensive formal analysis of processing incentives, develooping a new CGE model of the New Zealand economy, utilizing this model to evaluate the costs of export restrictions, and utilizing the GTAP to provide insights into the possible effect of the APEC Early Voluntary Sector Liberalization strategy.

1  Introduction

In many countries that depend heavily on the export of various forms of raw materials we can find policies designed to restrict those exports, in order to develop processing capabilities. Where those policies do not exist, we can invariably find calls for their institution. There is a common perception, even amongst some economists, that by exporting raw materials these countries are somehow not performing to their full potential. In New Zealand, much of the debate surrounding the use of processing incentives and restrictions of raw material exports has been focused on the forestry industry.

The New Zealand forestry sector is amongst the oldest and most historically, politically, and economically significant sectors in this country’s European history. Recognition of the importance of New Zealand’s forest reserves and their potential for economic exploitation dates back to at least 1769, when it was observed by Cook that the forest trees of New Zealand would, “with suitable preparation, be such masts as no country in Europe could produce” (cited in Roche, 1990, p. 14). New Zealand was in fact used as a source of spars for the British Admiralty decades before the Treaty of Waitangi was signed in 1840, and a domestic timber industry to supply the demands of colonisation emerged not long after. These demands eventually took their toll on the indigenous forest resource, leading to the creation of exotic plantations at the impetus of the state, in an effort to ensure a steady domestic supply. In more recent years, in particular those following the major restructuring of the industry that took place in the latter half of the 1980s, the forestry industry has, perhaps ironically, come under increasing scrutiny for its potential as a major source of export revenue for New Zealand, as supplies from plantations have begun to vastly outstrip demand. The sector is also a significant employer, and contributor to national income. Moreover, it is an industry that has come to embody the current New Zealand debate on foreign ownership, Maori land rights, environmental concerns, and the costs and benefits of encouraging the domestic processing of New Zealand’s resources.

However, despite its substantial importance to the New Zealand economy, surprisingly little extensive research has been undertaken on the forestry sector. This is particularly so with respect to trade policy aspects. Indeed, the vast majority of economic modelling effort within the forestry sector has been devoted to estimating the supply of wood, and the economics of different management regimes. It is a well accepted fact that there has been an imbalance of effort within New Zealand which has led to numerous models of the forest resource and limited attention to the market, and in particular to models of the small open economy and international trade.¹ This is surprising, since there are a number of significant areas of debate in the trade policy area (in particular relating to the issue of further processing), and a number of other issues that, while not the subject of major contention, have yet to be empirically examined (such as the benefits of liberalisation in export markets). It is the intention of this study to go some way towards correcting this imbalance of effort.

The study identifies and examines three core issues with respect to the issue of log export restrictions; the impact on processing and welfare; the effect of foreign ownership of the resource; and the possibility of utilising export restrictions as a retaliatory strategy against escalating tariff structures. It also examines the impact of liberalisation of forestry products trade on a region-wide basis.

The first issue is a long-standing one. New Zealand has a tendency to export largely unprocessed forest products (i.e., logs) rather than add value to the product within New Zealand, a tendency that has become increasingly prominent over recent years. While New Zealand has been taking a laissez-faire approach to the industry, this is not the case in other countries. For example, Indonesia has been utilising export restrictions on unprocessed roundwood to encourage domestic processing for a significant period of time now.² Moreover, Indonesia is not an isolated example, virtually all the wood producing economies in the Asia-Pacific region have imposed restrictions of some kind on the exporting of roundwood (FAO, 1993, p. 156). Export restrictions have also been used in New Zealand at various times in the past, and while calls for export restrictions are still made from time to time in New Zealand (usually by sawmillers concerned at paying world prices), it is perhaps surprising how little attention has been paid to the economic analysis of the issues that arise from such a policy proposal. One can find numerous government studies and papers replete with references to the desirability of increasing the level of domestic processing, but little in the way of concrete analysis. There are legitimate questions to be answered with respect to the benefits of policy induced increased domestic processing. Is it possible to increase welfare at the same time as increasing processing? Is restricting exports an appropriate policy intervention to increase the level of processing, or are other policy interventions likely to be less damaging in welfare terms?

A second issue, which makes the general analysis of export restrictions more complex, is the addition of another of the key focal points of more recent debate: the extent to which foreign ownership of the forestry resource has come about due to the government program for the sale of state forestry assets, which began in 1989. Currently the level of 100 percent foreign owned forest assets is around 18 percent of the total resource (nearly 50 percent if foreign shareholdings of the major New Zealand forestry companies - Carter Holt Harvey and Fletcher Challenge - are included). While much of the debate surrounding the issue of foreign ownership has focused on the issue of sovereignty, an issue difficult to deal with from an economic perspective, there is also the question of to what extent it is desirable to have foreign ownership of the forest resource. Much of the political rhetoric has focused on the supposed job creation and growth benefits of foreign investment, and the reduction in debt that the sale proceeds allow. However, when the investment concerned involves a mere transfer of existing resources from domestic to foreign control it is unclear as to from where these benefits arise. While these issues are largely beyond the scope of this study, the issue also poses an interesting question with respect to the arguments for export restrictions. Given foreign ownership of the forest resource, a log export tax may effect a transfer of income from foreign to domestic sources. How might this affect optimal strategies?

The third issue identified above relates to the tariff structures of the major wood importing countries in the region. Almost all have escalating structures (Japan and Korea in particular), designed to encourage importing raw materials for processing within the importing country. The existence of escalating tariffs may penalise New Zealand processing. However, the question as to whether retaliation by imposing export restrictions (which directly hurt the overseas processing industries in importing countries that rely on imported logs) could be an appropriate strategy, and under what circumstances, remains unanswered. Moreover, little is known about the extent of the effect of escalating tariffs, or the likely impact of their removal under the auspices of the APEC liberalisation agenda.

These issues are not unique to forestry, nor to New Zealand. However, none have been formally examined or empirically quantified in the New Zealand context. Moreover, the general literature, in particular that utilising general equilibrium methodology, is also relatively scarce. The objectives of this study are therefore as follows:

a)  To analyse in a formal general equilibrium framework that accounts for important intra-sectoral, inter-sectoral and regional linkages, the impact of export restrictions and other processing incentives, and of liberalisation in other markets, on processing, welfare, and income distribution.

b)  To use these formal results as the foundation of empirical study with the objective of determining the direction and quantifying the extent of changes in relevant economic variables, in particular economic welfare, as a result of export restrictions and other processing incentives for New Zealand forestry.

c)  To use these formal and empirical results to provide insights into the policy debate over export restrictions and processing in New Zealand, with reference to those issues identified above.

The perspective of this study is that of international trade theory, rather than forestry economics, and the methodology employed is a combination of formal economic modelling, and counterfactual simulation using computable general equilibrium (CGE) modelling techniques. Whilst CGE techniques have a number of well-known disadvantages (discussed in detail in Chapter 6), they also have numerous advantages. In particular, the models used here are based on clearly defined and described structural models, there is a high degree of theoretical and logical consistency, and we are able to incorporate facets of the processing issue that can only be done in a general equilibrium framework. We therefore believe that CGE is the best available technique for dealing with the issues identified in this study.

This study makes the following contributions to the existing literature on processing incentives and trade:

a)  Incorporating the issue of foreign ownership of natural resources into an extensive formal analysis of processing incentives, which in addition treats the forests as an intermediate good (in line with New Zealand’s emphasis on plantation forestry) rather than as an endowment.

b)  Developing a new, trade focused CGE model of the New Zealand economy with an emphasis on the forestry and forest processing sectors, which incorporates econometric estimates of key relational parameters.

c)  Utilising the above model to provide estimates of the effects of export restrictions and other processing incentives under a variety of assumptions on the New Zealand economy, and thus making possible a more informed policy debate.

d)  Utilising an existing global trade model (the GTAP) to provide insight into the possible effect of the removal of barriers to forest products trade in other economies, and in particular information on the possible effects of the APEC Early Voluntary Sector Liberalisation (EVSL) program.

The study is divided into three main sections. The first is largely background material, and is introductory in nature. Chapter 2 contains an overview of the New Zealand forestry sector and its place in the New Zealand and global economies, to familiarise those who are new to the sector. Readers familiar with the features of New Zealand forestry may prefer to skip this chapter and delve directly into Chapter 3, which contains a description of current issues facing the sector, in a sense defining more clearly the motivation for this study, and a review of some of the arguments for processing incentives. This chapter also contains some discussion of the international agreements covering the use of such incentives. Finally, Chapter 4 is a review of the existing applied literature on this topic.

The second section of the study, Chapter 5, takes each of the three aspects of processing incentives discussed above and analyses them in turn in a formal mathematical framework. Here export restrictions and other processing incentives are examined in the context of a number of formal general equilibrium models, beginning with the price-exogeneous (small country) case, and turning later to a two-country trading equilibrium model. The purpose of this chapter is twofold. First is to formally describe the impact of intervention on factor prices, output, trade and utility. The models presented in this chapter therefore serve to clarify and formalise the underlying structure of the larger computable models that follow. Second is to identify those aspects of the problems that are not amenable to a neat theoretical solution, and for which other methods must be employed. This chapter may be useful for those interested in theoretical aspects of processing incentives, regardless of the industry involved.

The final section of the study is the largest, and concerns the empirical application of the theoretical models developed in Chapter 5 to the New Zealand context. Chapter 6 describes a computable general equilibrium (CGE) model that we develop of the New Zealand economy, which is specifically designed with a focus on the forestry sector. This chapter also contains details of the data used in the study, in particular base year equilibrium data, data for parameter estimation, and external sources of parameters. The chapter intentionally contains a considerable amount of technical detail on the structure of the model, the data, and the techniques of implementation. Again, it is hoped that this material may be useful for those considering similar exercises for related problems, but much of the material can be safely skipped for those who are not interested in the finer points of the modelling. The model developed is used for detailed analysis of the export restriction debate in Chapter 7, which contains the results of simulating various policies within this framework, and discussion of their policy implications. We are able to use the model not only to give us unambiguous answers where a theoretical model cannot, but also to estimate the likely magnitude of effects on welfare, factor incomes, outputs, resource pulls, etc. Chapter 8 considers the issues detailed above by making use of a major recent development in the CGE literature, the GTAP. The GTAP is a global trade model, incorporating data on all of New Zealand’s major trading partners. Hence, although its use raises some compatibility issues, the GTAP is particularly suitable for analysing the effect of liberalisation in forestry by other countries. In addition, since the GTAP allows us to account for inter-regional linkages in a manner not possible with a single country model, it also serves a role in helping to understand the sensitivity of the results of Chapter 7 to the single country model specification. Finally, Chapter 9 contains a summary and conclusions.

Notes

¹  See Leslie (1986), Hunter (1989) and Whyte (1989), and discussion in Chapter 3.

²  The Indonesian example is discussed at further length in Chapter 3. See also Wijewardana (1989) for an overview, and Lindsay (1989) and Sidabutar (1988) for examples of studies attempting to estimate the cost of export restrictions for Indonesia.

2 An Overview of the New Zealand Forestry Sector

Introduction

In this chapter we examine the current state of, and trends evident in, the New Zealand forestry sector. The objective of this chapter is to provide a brief summary of the scope and structure of the sector, and to highlight some of the more important aspects of the sector’s structure, performance, and contribution to the New Zealand economy. As this is a study of economic policy issues, it is not possible to provide an in depth history of the sector, although the topic is of considerable interest.¹ Nor is it possible to provide details on the processing or marketing of forest products. Other works written by forestry experts dealing with these issues are available. Other useful overviews are provided by Brown (1997) and Le Heron (1997).

The c...

Table of contents

• Cover
• Title Page
• Copyright Page
• Original Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgements
• List of Abbreviations
• 1 Introduction
• 2 An Overview of the New Zealand Forestry Sector
• 3 Rationales for Processing Incentives
• 4 Forestry Models
• 5 A General Equilibrium Approach to Processing and Trade
• 6 A Computable General Equilibrium Model
• 7 Model Results
• 8 Global Trade Analysis
• 9 Conclusion
• Appendices
• Bibliography
• Author Index
• Subject Index