Trade Policy, Processing, and New Zealand Forestry

Abstract

The New Zealand forestry sector is well recognised as being amongst the oldest and most historically, politically, and economically significant sectors in this country's European history. In recent years, in particular those following the major restructuring of the industry which took place in the latter half of the 1980s, the forestry industry has come under increasing scrutiny for its potential as a major source of export revenue for New Zealand, as supplies have begun to vastly outstrip demand. The sector is also a significant employer, and contributor to national income. Moreover, it is an industry which has come to embody the current New Zealand debate on foreign ownership, environmental concerns, and in particular, 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. 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 models of the small open economy and international trade. This study partially corrects this imbalance. It 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 in respect of the income transfers which result from processing incentives: 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 methodology employed in this study is a combination of formal economic modelling, and counterfactual simulation using computable general equilibrium (CGE) modelling techniques. We make use of both our own purpose-built single country model, and the existing GTAP model in our simulations. The study makes a contribution to the existing literature by incorporating foreign ownership into a formal analysis of processing incentives, developing a new CGE model of the New Zealand economy which incorporates econometric estimates of key relational parameters, utilising this model to evaluate the costs of export restrictions - which are shown to be substantial, and utilising the GTAP to provide insights into the possible effect of the APEC Early Voluntary Sector Liberalisation strategy - where we find evidence to suggest that MFN liberalisation by APEC members may lower group welfare.