Mov­ing up the value chain

John Wal­ley of­fers ad­vice on how to in­crease the high value added con­tent in our ex­ports.

Exporter - - VIEWPOINT -

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.

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