John Ballingall and Tracey Epps examine what export businesses can do to insulate themselves from the effects of the world’s increasingly complex trading environment.
We are currently experiencing a period of turbulence and uncertainty in the global trading environment that is unprecedented since World War II. Since the signing of the General Agreement on Tariffs and Trade (GATT), all signs seemed to point towards continued global integration and liberalisation. In other words, things would only get easier for business.
But recent events – the ‘trade wars’, increased protectionism, Brexit, sanctions, populism -have turned that orthodoxy on its head. The world is becoming a much more complicated place and, as New Zealand businesses are discovering, trading in the global economy is more complex than ever before.
The World Bank estimates that two-thirds of international trade takes place through global supply chains in which production crosses at least one border, and typically many borders, before final assembly. The iPhone is perhaps the most well-known example, with parts sourced from over 30 countries.
But even a relatively simple product, such as clothing, can also have a complex supply chain. Icebreaker, the ubiquitous New Zealand brand, works with over 81 suppliers and 100 factories worldwide, including in Asia, Europe, the Americas, and the Pacific.
A result of this deep interconnectedness is that a change in one part of a global supply chain can have a knock-on impact in other countries. In economic terms, there are two key types of effects: income and substitution.
Income effects are fairly straightforward: slower GDP growth in key markets such as China equates to lower demand for imports from New Zealand.
Substitution effects are more complicated and involve changing patterns of supply and demand as countries become more or less competitive. For example, Viet Nam is increasing its steel exports to the US because the tariffs the US has slapped on Chinese steel have made China less competitive.
A twist on the same theme closer to home is the experience of Canterbury-based New Zealand Light Leathers which had carved out a niche for itself supplying deer leather to luxury European brands like Gucci and Prada.
Stuff reports that the company is now facing destabilising price competition from US deer skin suppliers. These suppliers have diverted their product to Europe after Chinese tanners cancelled their orders due to the increased tariffs they had to pay on US products coming into China
“New Zealand businesses will need to put a premium on understanding the international trade policy environment, not only in countries with which they deal directly but also wherever they have a supply chain connection.”
Then there is the gathering uncertainty around Brexit. While the income effects of a ‘no deal’ Brexit are likely to be negative, there could nevertheless be positive substitution effects for New Zealand exporters if EU producers also face tariffs in the UK market – they may lose their margin of preference.
Unfortunately there are no easy solutions or crystal balls, and the net effect of the income and substitution effects is hard to assess.
What we do know is that New Zealand businesses – small and large – will need to put a premium on understanding the international trade policy environment, not only in countries with which they deal directly but also wherever they have a supply chain connection.
And as the Light Leathers example demonstrates, businesses should go further and think laterally as to any possible ricochet or substitution effects that may at some stage affect them.
The good news is that there are many resources available to help, including Export New Zealand, the Ministry of Foreign Affairs and Trade, and private partners. Being forewarned is forearmed.
John Ballingall is CEO of Sense Partners – and Tracey Epps, a Trade Law Consultant with Chapman Tripp.
 World Bank, at 2.
 See Icebreaker Transparency Report, available at: https://res.cloudinary.com/icebreakernz/image/upload/v1561408911/ourstory/reports/transparency_report_lowres_2018.pdf