Moving up the value chain
John Walley offers advice on how to increase the high value added content in our exports.
One of the keys to New Zealand's future success will be our ability to move from a producer of low value bulk commodities, to add value and produce elaborately transformed products and associated services. Generally we have been trending towards less added value and have seen growth in bulk primary products; changing this trend requires significant policy change.
In the graph, you can see some negative trends in real terms over the past ten years. The top two lines are essentially bulk commodity goods. These have seen growth over this time, largely because of the growth of the dairy industry and the sale of logs. Conversely, the sectors which add value, elaborately and simply transformed manufactures, have been more or less stagnant.
There are many reasons for this difference in growth, but policy settings are the most critical, these are a matter of political choice and can be changed to make a difference.
One of the drivers of this difference is the absence of a Capital Gains Tax. This means investment is incentivised towards asset heavy low revenue enterprises, which are generally in the primary sector. This tax imbalance takes investment capital away from added value activity, which tends to be high revenue, but lower in assets.
Equally in times when there is hot money in the global economy it tends to find its way into asset markets, chasing higher interest rates and lifting exchange rates, sandbagging returns to those exporters not betting on capital gains to make the enterprise worthwhile. Why should we care? The high value added sectors, the simply and elaborately transformed products and attendant services are important for a number of reasons. The sector provides well paid jobs, including form of IP, which supports higher margins. R&D tax credits would be a policy choice to support and promote this activity; tax credits have a broader reach and better fit the structure and scale of industry in New Zealand; much more effective than winner picking grant systems.
Accelerated depreciation on manufacturing equipment would encourage more firms to keep up with rapidly changing technologies, a vital part of staying competitive. It is worth noting this does not change the tax take, only the timing of tax payments.
An overvalued exchange rate acts as a barrier for exporters and import competing industries. While this has the immediate effect of reducing their margins, this will over time affect their investment decisions. If a reasonable ROI is threatened by currency appreciation; investment falls and with it future competitiveness. The development and maintenance of skills and innovation will also be damaged.
While this is not overly visible, it is a concern that warrants a policy response if we are to increase our high value added content in our exports.