Scoop Election 08: edited by Gordon Campbell

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Gordon Campbell on the Killing of Local Manufacturing

July 24th, 2008

Take my word on this, but the government’s omnibus tax bill that got its first reading last night contains some pretty startling measures. One of its main features was an incentive for New Zealand firms to re-locate their manufacturing base offshore – which seems a mighty strange thing for a Labour government to be doing, especially when it is co-hosting a programme called Buy Kiwi Made, and putting taxpayer dollars and a major national advertising campaign behind it.

Jo Doolan put it this way in the Independent Financial Review a couple of weeks ago,: “If you manufacture in a country such as China [ think as an example : Icebreaker ] your income won’t be taxable in New Zealand…while I applaud this as a measure that makes us more competitive internationally, I worry about how much business this could drive offshore.” Me too. Especially when the Bill is being packaged as the very opposite. Page two of the Bill for instance says: ‘ The current rules impose additional tax costs on globally connected firms that are not faced by firms resident in other countries. This difference, more pronounced over time, is creating an incentive for New Zealand firms to migrate, in particular to Australia.”

So, in order to staunch the flow of Kiwi firms going to Australia in order to get a tax break from re-locating their manufacturing to China ot elsewhere – we’re going to enable them to stay at home and get a tax break from outsourcing their manufacturing to China or elsewhere. By doing so, we’re also going to put at a tax dis-advantage ( and penalize) those firms that loyally stay here. Sue Bradford pointed out several such cases in the House last night :

“What the Government is proposing will give Icebreaker a tax cut for making lovely outdoor wear in China, but not Earth Sea Sky making lovely outdoor wear in Christchurch. Norsewear, that former iconic brand, will reap a financial benefit for having taken its jobs to Asia, while Swazi, staunchly staying local, will miss out.

This Bill will give tax cuts to large firms that send fish to China for filleting and packing, but not to small fishermen who process locally, and who create environmental and social benefits by not carting fish back and forth across the planet.

This Bill would give Fisher and Paykel a tax cut for the whitewear it makes in Mexico but not for the whitewear it makes in Auckland.

Speaking in defence of the Bill last night Finance Minister Michael Cullen mounted a variant of the “Shoot the Cabin Boy” argument. All those on board Lifeboat New Zealand would perish through the combined onslaught of offshore cheap labour and tax breaks, unless sacrifices occurred in the short term, to enable the strongest to survive.

In Cullen’s view, those enterprises willing and able to internationalise their operations will reap the benefits of the tax break and the outsourcing – while still keeping some of their taxable income located here, in the shape of a head office, and the bulk of the design/IP end of the operations. In Cullen’s words :

Are we going to play a long defensive game trying to keep what little we have, instead of trying to expand and develop these international connections and retain the highest quality, highest paying highest value parts of the production system within New Zealand ?

If we opt for the ‘ little New Zealand’ approach we will defeat ourselves in the end…. If we opt for an outward looking approach, then there is a very real prospect that we will be more capable of succeeding economically than we have for the last 40 0r 50 years. That is the choice that a small, isolated economy in the southwest Pacific faces.

This choice, Cullen argued, was a lesser evil than people either closing down or moving lock, stock and barrel offshore. All up, the Bill is a pretty powerful example of the way economic globalization is eroding our national sovereignty. Does it matter in the end, that the government appears to have let globalization have its way with New Zealand once again ?

Well, it will matter to the workers and communities where their government is thereby helping to wipe out jobs in local manufacturing. I think it also matters at the high end of the economy too. All very well to extol a vision of New Zealand firms being high value, design savvy, technically adept, owning the IP rights – and globally competitive because they’ve outsourced the menial side of their operations to China or Vietnam or whatever the national sweatshop du jour might be.

But creativity – say for example, in the fashion industry – doesn’t spring from the forehead of Kiwi geniuses. It is often highly dependent on the technical skills and expertise that is honed and sustained by a viable manufacturing base. The Karen Walkers of the world have stood on thed shoulkders of a locall manufacturing industry. For that reason alone, the measures may well lead to a withering of the very processes that the Bill is trying to preserve.

Here’s Bradford, wrapping up :

I do not understand Dr Cullen. On the one hand he and his Government have done a great thing, buying back and reinvesting in rail, biting the bullet on the cost because Labour does appear to understand on one level that climate change and peak oil mean we must rebuild our national passenger and freight infrastructure.

On the other hand, and simultaneously, he is presiding over the incongruous aberration in front of us tonight, aimed, it seems, at undermining any desire by New Zealand manufacturers to keep making things here.

Footnote : the petroleum mining measures in the Bill are also pretty interesting. The banner measure announced here ( page 14 of the Bill) is that we’re trying to boost the returns New Zealand will reap from its petroleum deposits. How so? By ‘ preventing foreign branch petroleum mining expenditure being offset against income from petroleum mining in New Zealand…. This amendment ensures that New Zealand receives its proper share of benefit from New Zealand petroleum resources..”

Hey, that sounds really good. By stopping foreign firms offsetting their foreign losses against their New Zealand income, we get a bigger tax take from them, for their Kiwi earnings. So how come, I was told, the Treasury estimates seem to show a net loss over the forecast period, from the petroleum provisions contained within the Bill ?

Oh, that’s because we’re giving away so much in other inducements that this more than cancels out any revenue gains from shutting the door on foreign offsets. We are doing this at a time when New Zealand is already offering royalty/tax regimes to overseas petroleum exploration companies lower than almost anywhere else in the world. New Zealand’s approach to globalization is a bit like the stereotypes that people had of the Italians during World War II – we’ve made an art form out of acts of surrender, and called it realism.


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