Matt Nolan discussed the benefits of trade for a small open economy on Rates Blog (Infometrics copy here), and some of the specific factors for New Zealand. Namely, the fact that New Zealand’s comparative advantage is in a homogenous product, where New Zealand as a whole only provides a tiny amount of the world’s supply. In this context, if demand or supply changes in our of New Zealand’s target markets it is relatively easy for dairy or meat producers to slip the products somewhere else for a slightly lower process (relative to if New Zealand sold very specific goods within a global supply chain).
New Zealand’s small size and exporters reliance on homogenous goods actually makes the country relatively resilient to global economic shocks – an important point to keep in mind when demanding that the government interfere to “restructure” or “rebalance” the economy.
However, he does touch on the idea of terms of trade shocks, and the justification for insurance.
Then Matt wrote up a guest Top-ten at ten last week. In this, he focused on trade during the Great Depression and now – before swinging to a couple of posts by Aaron Schiff and Eric Crampton discussing the importance of competition to domestic industries. That can in turn be expanded by thinking about services and the changing nature of scarcity. At the end of it all he concluded:
We are moving into a world where trade in services is becoming more important, more valuable, and where it is removing the burden of distance from New Zealand firms. The fact the world is changing, and that New Zealand firms and households have to be prepared to change with it, is an important point to keep in mind – both in terms of what we can expect, and what policies government should be putting in place.