The impact of economic policies on the motor vehicle assembly industry of New Zealand: an effective protection analysis

Abstract

The New Zealand motor vehicle assembly and component industry has been insulated from overseas competition since 1907. Protection from completely built up overseas vehicles, in the form of import licensing and import tariffs has provided the local assembly industry with a margin of protection which the industry felt was necessary to assemble completely knocked down vehicle kits.

In 1983 the Government commissioned an Industry Development Plan of the motor vehicle industry, with the objective of maintaining the assembly and component industry while improving its efficiency. The plan resulted in the removal of import licensing, the reduction of tariffs and allowed for the importation of vehicle components.

The theory of effective and nominal protection and the optimal tariff theory were used in this dissertation to measure the efficiency of these policy changes.

Although the effective and nominal estimates have decreased since the Development Plan, they are all positive which would indicate that the current and past levels of protection have allowed the assemblers to earn revenues well above what would have been possible in a free trade environment.

The optimal tariff is derived from the reciprocal of the import supply elasticity for new vehicles. The elasticity estimation yielded a value of 10, which implies that an import tariff of 10 percent would maximize New Zealand's welfare. The current levels of import protection, however, are much higher than the derived optimal tariff.