Brentry: How New Zealand Coped

This is based on a note that I prepared for a journalist. It is a lead into the next column which is on ‘Brexit: How New Zealand Might Cope’.

New Zealand has an unusual situation in the world economy. Despite being among the affluent economies, its success is vitally dependent upon the export of some primary products (especially dairy and meat products) whose domestic production is brutally protected in many jurisdictions. Thus a considerable effort in its trade negotiations is aimed at rolling back the protection of food production in other affluent economies. (An additional complication has been the dumping from these protected markets into third markets. The 2015 Nairobi package prohibited such dumping but it will have to be policed.)

The widely held view at the time (and often today) by the general New Zealand population was that Britain entering the European Community (EC) in 1973 was an economic disaster for New Zealand. It was not a disaster. Rather a number of unconnected events meant New Zealand faced considerable challenges in the decade after 1966. It was easy to blame this all on Brentry, especially as there was much emotional dismay at the joining. I sometimes liken it to the attitude of a child to mummy rushing off with a continental gentleman, convinced that everything dreadful was caused by this elopement.

In contrast, some time in the 1960s New Zealand strategists concluded that it was almost inevitable that Britain would join the European Economic Community (EEC). It was based on a practical assessment that Britain had a diminishing role in the world both as its empire unravelled and as other economies became more important. In the New Zealand strategists’ judgement, Britain joining the EEC (it became the EC in 1973 and is now the European Union (EU)) would have greater economic strength and a greater role in the world; New Zealand would be a beneficiary. The view, I suppose, was an affectionate child wanting a new life for the widowed mother.

By the early 1970s the New Zealand position was that, as Bentry was in Britain’s best interests, it supported the United Kingdom’s entry into the EC providing the particular interests of New Zealand were not damaged. The logic of external policy, shaped by this belief, was export diversification.

New Zealand began diversifying its exports in the 1960s. There were numerous policy measures, the most obvious being NAFTA, the New Zealand Australian Free Trade Agreement, signed in 1966. But others included the export performance tax incentive, the 1967 devaluation and an increase in diplomatic missions to potential markets. Other markets, such as Japan and the US  were opened up (often to a limited, but helpful, degree). There was also a change in attitude as the upcoming generation saw commercial opportunities offshore which were not available in the insulated economy.

There was also a bit of luck. The oil price shock of 1973/4 hit New Zealand, as it did other affluent economies, with higher energy prices. But the oil producing economies of the Middle East increased purchases of sheepmeats which proved to be lucrative.

According to economic historian John Gould, who died recently, New Zealand had the greatest external diversification in product and destination of any OECD economy between 1965 and 1980.

It was butter for which it proved hardest to find alternative markets. As a consequence New Zealand negotiators sacrificed its British cheese market in order to maximise its butter quota (often pronounced ‘budder quoda’) into the EC. (Older readers will recall TV advertisements for a ‘bigger block of cheese’ as we tried to sell more at home because we could not sell it in Britain.)

However, by far the most important economic shock of the time was the 40 percent collapse of the wool price at the end of 1966. At the time wool made up 40 percent of the export revenue so it represented a 16 percent loss of export revenue – virtually overnight.

The wool price temporarily recovered during the world commodity price boom in 1972/73. But the oil price shock of 1973/74 together with the collapse of the world commodity price boom  took wool prices back to the level they had been in the 1966 to 1971 period. There has been no recovery.

Critical for New Zealand, wool and sheepmeats were joint products. The collapse of the wool price thereby compromised the sheepmeats industry. Fortunately farmers adjusted and lamb remains one of New Zealand’s largest exports, but today it is sold to many offshore markets in contrast to almost only to Britain before 1966. Today wool export receipts today account for only about 1 percent of New Zealand’s total earnings from goods and services export.

This required considerable adjustment of the whole economy. Not unexpectedly, New Zealand entered a period of slow growth for at least ten years.

Of course, New Zealand publicly said it was barely satisfied with the deal it got out of the EEC negotiations. Of course, the terms could have been better. But a reasonable quota for butter and lamb and a phasing out of the cheese quota (which was partly reversed under the Tokyo Round) was not a bad deal and could be coped with – with some difficulties of course.

The externals shocks of 1974 tipped the New Zealand economy back into the recession/slow growth phase of the 1966 to 1971 period. But it was not the British entry which caused this long recession. It could not have been for, insofar as they were binding, the quotas were phased out to lower levels over a longer period. Other external economic events were disrupting the economy.

So New Zealand was preparing for British entry to the European Community for almost a decade before it occurred especially by diversifying what it exported and where it exported to. The deal New Zealand got was reasonable and involved phasing the quota levels, thereby easing the adjustment. It could have been (or was) coped with but the wool price crash, in particular, and other external events were much more damaging and confused the impact of British entry in the popular mind.