Category Archives: Trade

Globalisation for Africa

By end of the century 40% of the world’s population is projected to be living in Africa and still globalisation seems to have a limited impact on its people. In order to make Africa more inclusive policies will have to focus on accelerating regional integration, bridging gaps in labor skills and digital infrastructure, and creating a mechanism to own and regulate Africa’s digital data. Although the first industrial revolution resulted in a significant increase in international trade Africa has been a poor benefactor and this has led to the “great divergence” in income levels between the Global North and South. In the 1980s, the Brandt Line was developed as a way of showing the how the world was geographically split into relatively richer and poorer nations. According to this model:

  • Richer countries are almost all located in the Northern Hemisphere, with the exception of Australia and New Zealand.
  • Poorer countries are mostly located in tropical regions and in the Southern Hemisphere.

With the advances in technology over the last two decades Asian countries like China, Taiwan and South Korea have been able to narrow the gap with developed nations mainly because of the emergence of complex global value chains. However although Africa might have benefitted from the commodities market developed economies can now produce goods more cheaply and African countries have found it difficult to develop local industries that create jobs.

Unsurprisingly the economic disparity between Africa and richer countries has widened in recent decades, with the ratio of African incomes to those in advanced economies falling from 12% in the early 1980s to 8% today. In order to reverse this trend and enable Africa to benefit more from globalisation, the region’s policymakers should accelerate their efforts in three areas.

Policies to promote growth in Africa:

  1. Governments should promote further regional integration to make Africa economically stronger and more effective at advancing its agenda internationally. Progress so far is very encouraging.
  2. Africa must improve its digital infrastructure and technology-related skills to avoid being further marginalised. Moreover, the low-cost, low-skill labour on which Africa has traditionally relied is becoming less of a competitive advantage, given the advent of the Fourth Industrial Revolution
  3. Africa must create a system for owning and regulating its digital data. In the modern era, capital has displaced land as the most important asset and determinant of wealth.

By 2030, the continent will be home to almost 90% of the world’s poorest people. Unless globalisation works better for Africa than it has in the past, its promise of shared prosperity will remain unfulfilled.

Source: Project Syndicate – Making Globalization Work for Africa May 30, 2019 Ngozi Okonjo-Iweala , Brahima Coulibaly

Trump: Tariffs first, negotiate later

The direct impact of the US-China trade war has yet to materialise. The global economic slowdown started long before the opening shots were fired in this bitter battle. Central banks are getting ready to cut interest rates, if they haven’t already started, to support growth.

All this to mitigate the fallout from US President Donald Trump’s doctrine of tariffs first, negotiate later. Trade talks with China have broken down; Huawei can’t buy US goods; Trump has threatened tariffs on imported cars from Europe and Japan. Sanctions against Cuba, Iran and Venezuela have yet to yield any benefits. And in his latest move, he has decided Mexico needs to do more to stop immigration. If it doesn’t, there will be tariffs for Mexico as well – a move that’s rattled global markets.

Mexico is the US’s biggest trading partner, exporting $347bn to the US in 2018. A 25 percent tariff would cost about $86bn a year. With many US and international car makers located south of the US border, the auto industry would be the hardest hit. Deutsche Bank estimates vehicle prices could rise on average $1,300 – if tariffs hit 25 percent.

While Trump wants automakers to move back to the US – which is highly unlikely – this could have a devastating impact in Mexico where 839,571 people are employed in the car industry. According to economic consultancy Perryman Group, more than 400,000 US jobs could be lost if the US imposed the 5 percent levy; the net loss to the economy could be $41bn; and the state that’s most dependent on Mexico, Texas, stands to lose more than 100,000 jobs and $7bn in income. If Trump’s trade war with China is anything to go by – the damage to the economy has already been done. The president has signed a $16bn bailout for farmers. Source: Al Jazeera – 9th June 2019

US – China trade war. Who has the power?

Another PBS video from Paul Solmon about the trade war between the US and China. The trade war hits China more for two reasons:

  1. Trade makes up a much higher proportion of China’s GDP than that of the USA
  2. With the Chinese economy slowing there is a big reliance on the export sector as an employer

The Chinese have certain options (see below) open to them which are discussed in the video below.

  1. Bond dump
  2. Squeezing US firms in China
  3. Pull back on the number of Chinese coming to US for education
  4. Devalue their currency
  5. China might make sweetheart trade deals with other countries leaving out the US

Brexit and the Common Agricultural Policy (CAP)

With the 29th March deadline approaching UK farmers are particularly opposed to a no-deal Brexit; customs hold-ups at the borders could ruin fresh produce. And there is concern that new trade deals with countries like New Zealand could lead to a flood of cheap imports and therefore making it harder for British farmers.

The EU bloc receives receives about 60% of UK food exports with 70% of the UK food imports come from the EU bloc. Lamb and beef exports could face export tariffs of at least 40% if the UK reverted to World Trade Organization rules under a no-deal exit. The UK produces approximately 60% of what is required to feed its population with the remainder being imported. The UK’s £110bn-a-year agriculture and food sector is deeply integrated with Europe relying on the bloc for agricultural subsidies of £3.1bn ($4bn) under the CAP – Common Agricultural Policy. The government has promised to pay the equivalent of the CAP subsidies up to 2022, no one is certain what will happen after that.

What is CAP?

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector has been known as the common agricultural policy – CAP. The CAP was established under Article Thirty Nine of the Treaty of Rome, and its objectives – the justification for the CAP – are as follows:

1. Raise and maintain farm incomes, through the establishment of high prices for food. Such prices are often in excess of the free market equilibrium. This necessarily means support buying of surpluses and raising tariffs on cheaper imported food to give domestic preference.
2. To reduce the wide flutuations that often occur in the price of agriculutural products due to uncertain supplies.
3. To increase the mobility of resources in farming and to increase the efficiency of all units. To reduce the number of farms and farmers especially in monoculturalistic agriculture.
4. To stimulate increased production to achieve European self sufficiency to satisfy the consumption of food from our own resources.
5. To protect consumers from violent price changes and to guarantee a wide choice in the shop, without shortages.

CAP Intervention Price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
4. There is a contraction in domestic consumption to 0Qd1
Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

CAP Int Price
Figure 1: The effect of an intervention price on the income of EU farmers.

The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU.

Brexit and New Zealand’s trade with the UK and the EU

The impact of Brexit on New Zealand depends on what kind of exit agreements are reached between the UK and the European Union. The published provisional deal includes a transition period which runs until the end of 2020. During this time, existing trade conditions for third parties (such as New Zealand) will continue. Below are tables showing the trade relationship between New Zealand and both the EU and the UK. The benefits of two way trade with the EU outweigh those of the UK – US$23,273m against that of the US$5,640m

March 2018 – New Zealand’s total trade balance was a surplus of $4.0 billion in the year – this surplus is up $1.3 billion from the trade surplus in the year ended March 2017.
Total exports of goods and services were $78.0 billion, while total imports were $73.9 billion.

China ($15.3 billion) and Australia ($13.9 billion) were the top export destinations.
The European Union ($13.4 billion) and Australia ($12.1 billion) were the top import sources.

Dairy products and logs to China were New Zealand’s top two export commodities by destination, earning $4.0 billion and $2.6 billion, respectively. This was followed closely by spending by visitors from the European Union ($2.2 billion) and Australia ($2.1 billion).

New Zealand’s negotiations

New Zealand is in negotiations with the UK over a FTA. According to New Zealand Foreign Affairs and Trade NZ wants the following from a FTA:

  • Removing tariffs and other barriers that restrict the free flow of goods between our two countries
  • Making it easier for traders of all sizes to do business in the UK, including services exporters
    Strengthening  cooperation and dialogue with the UK in a variety of trade and economic fields
  • Reflecting our goals including progress on gender equality,  indigenous rights,  climate change, and improved environmental outcomes.
  • Some key areas in which we will be seeking even closer cooperation with the UK under the FTA include:
  • High quality primary sector and goods access to the UK’s market, such as for meat, mechanical machinery and equipment, fruit, pharmaceuticals, forestry, dairy and wine
  • Helpful conditions for investment and services providers who operate between the two countries
  • Commitments on progressive trade issues including environmental and labour protections, indigenous rights and gender equality.

Sources:

  • Parliamentary Library Monthly Economic Review – December 2018.
  • New Zealand Foreign Affairs and Trade. 

https://www.mfat.govt.nz/en/about-us/work-with-us/vacancies/

 

 

New Zealand’s Terms of Trade – Milk Powder v Oil

The recent history of New Zealand’s terms of trade has been largely linked to dairy product export prices although in a longer-term context the price of imported oil has been paramount. Today we can see that the price of powdered milk (export) and the price of brent crude oil (import) are heading in the wrong directions. Powdered milk prices are falling and brent crude oil prices are rising which makes for an unfavourable terms of trade – see graph. This is not a good sign for the terms of trade which reached its peak in March this year.

What is the Terms of Trade.
The terms of trade index measures the value of a unit of exports in terms of the number of imports it can buy, or the purchasing power of our exports. This is similar to comparing the number of sheep exports that will buy a typical imported family car, from one time to another. The formula is:
Formula: Terms of Trade (TOT) =

Export Price Index (Px)           x   1000 (base year)
Import Price Index (Pm)

  • An increase in the TOT (e.g. from 1050 to 1200) is called “favourable”
  • A decrease in the TOT (e.g. from 1050 to 970) is called “unfavourable”

A “favourable” (increase) in the TOT may come about because the average:

– export price rose and import price stayed the same
– export prices rose faster than import prices
– export prices stayed the same and import prices fell
– export prices fell but import prices fell faster

The index number that results tells us whether merchandise export price movements have been favourable relative to import price movements. An increase in the terms of trade from 1000 to 1100 represents an increase in the purchasing power of our exports of 10% which means, other things being equal, we would be able to buy 10% more from overseas. As a country we would be wealthier. A decline in the terms of trade would result in the opposite situation.

Limitations of the Terms of Trade

Terms of trade calculations do not tell us about the volume of the countries’ exports, only relative changes between countries. To understand how a country’s social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows.

The price of exports from a country can be heavily influenced by the value of its currency, which can in turn be heavily influenced by the interest rate in that country. If the value of currency of a particular country is increased due to an increase in interest rate one can expect the terms of trade to improve. However this may not necessarily mean an improved standard of living for the country since an increase in the price of exports perceived by other nations will result in a lower volume of exports. As a result, exporters in the country may actually be struggling to sell their goods in the international market even though they are enjoying a (supposedly) high price. An example of this is the high export price suffered by New Zealand exporters since mid-2000 as a result of the historical mandate given to the Reserve Bank of New Zealand to control inflation.

In the real world of over 200 nations trading hundreds of thousands of products, terms of trade calculations can get very complex. Thus, the possibility of errors is significant.

Evaluation

  • A decline in the terms of trade is not necessarily a bad thing. For example, a decline in the terms of trade may occur due to a devaluation in the exchange rate. This devaluation may enable a country to regain competitiveness and increase the quantity of exports.
  • The impact of a decline in the terms of trade will depend on the elasticity of demand. If demand is elastic, the lower price of exports will cause a bigger % increase in demand.
  • Some Less Developed Countries (LDCs) have seen an improvement in terms of trade because of rising price of commodities and food post 2008. It is not always LDCs who see a decline in the terms of trade.
  • It is important to distinguish between a short term decline in terms of trade and a long term decline. A long term decline is more serious for reflecting a fall in living standards.

Global Dairy Prices down but why does NZ have such high milk prices?

On the 21st August the GDT Price Index continued its decline and dipped 3.6pc, with an average selling price of $3,044 per tonne. Whole milk powder was down 2.1% at $2,883 – see graph below:

How does the GDT work?

GlobalDairyTrade trading events are conducted as ascending-price clock auctions run over several bidding rounds.  In each auction a specified maximum quantity of each product is offered for sale at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. If the price of a product increases between rounds, to ensure their desired quantity a bidder must bid their desired quantity at the new, higher price. Generally, as the price of a product increases, the quantity of bids received for that product decreases. The trading event runs over several rounds with the prices increasing round to round until the quantity of bids received for each product on offer matches the quantity on offer for the product (as shown in the diagram below). Each trading event typically lasts approximately 2 hours.

Why are prices so high in NZ?

Fonterra is responsible for 30% of the world’s dairy exports with revenue exceeding NZ$20 billion and is New Zealand’s largest company. With New Zealand being one of the biggest producers you would expect prices for New Zealand consumers to be lower than what they are – a litre of fresh milk in Germany was selling for the equivalent of $1.51, compared to $2.37 in New Zealand.

Milk being inelastic in demand and is an essential part of the typical family shopping basket. Up until 1976 the price of milk was set by the government and producers were subsidised the loss that they incurred by a set price. The subsidy was completely removed in 1985 and by 1993, milk could be sold at any price. In January 1994, two litres was selling for the modern equivalent of $3.95. Consumer NZ estimates that for every $3.56 bottle of milk (an average retail price at present), about $1.19 would go to the farmer, $1.91 to the processor and retailer and 46c to GST.

Who gets what?

Because Fonterra take over 80% of what farmers produce it is difficult for the market to decide what an appropriate price to pay farmers. Therefore they work out what they believe is the highest sustainable price it can pay its farmers. It looks at the global dairy trade auction price and operating costs and capital costs to determine the farm gate price.

GDT price – Operating Costs – Capital Costs = Farm Gate Price

So farmers in New Zealand are at the mercy of the global market not how much is demanded in NZ supermarkets.

NZ Supermarket Prices

Supermarkets buy their milk from local distributors, either direct from Fonterra or other processors such as Synlait, or from suppliers who had value along the way. They then add their own costs to give a final price to the consumer but New Zealand food retailing effectively is a duopoly. Milk in Germany is much lower in price because of the high levels of competition with multiple chains operating there. In New Zealand however the price consumers pay reflects the concentrated nature of the market. Domestic milk market is dominated by one big supplier, Fonterra (see graph below), and two big supermarket chains – Foodstuffs and Progressive Enterprises – which means there’s little competition for your dairy dollar.

US and China trade war and what it means.

Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.

USA China trade war – who would win?

After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.

US list covers Chinese products worth – $US$46bn in 2017 – 9% of exports to USA.
Chinese list covers US products worth – US$50bn in 2017 – 38% of exports to China

Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.

The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.

Good long-run deal for China

It seems that China has the dominant position for the following reasons:

  • China can stop purchasing US aircraft
  • Impose an embargo on US soybean products
  • Dump US Treasury Bills and other securities
  • Chinese companies could reduce demand for US business services
  • The government could persuade firms not to buy US products

China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks

Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below:

Source:                                                                                                                                                        The Economist – Blow for Blow – April 7th 2018

US question globalisation whilst India embrace global trade

The Belt and Road Initiative (BRI) is a development strategy proposed by the Chinese government that focuses on connectivity and cooperation between Eurasian countries. Through infrastructure development China wants to boost trade and stimulate growth across Asia and into Europe. Ratings agency Fitch said that $900bn in projects were planned or in progress.

India is a country that will benefit from this development and recently Prime Minister Modi positively responded to Chinese President XI Jinping’s vision of the world – the BRI being the most obvious and a catalyst to India’s foreign policy aims which responds to the global trends. These are:

  1. India has the potential to become the world’s third largest economy by 2030. It intends to do this by sharing prosperity and working with other countries to set joint goals.
  2. Political ideologies are now encompassing equity and environmental issues. In India they are becoming more main stream policies for government and sustainable resources use is important in the 21st century.
  3. India is looking at Asia as the largest common market. Asia is reverting to its historical equilibrium of an integrated continent and does not want to choose between India or China. Instead, it supports a resetting of their relations to shape the goals of the ‘Asian Century’, which include the Bell and Belt Initiative and security related differences.
  4. India has a comparative advantage in the digital world and the potential to be the engine behind global growth.
  5. India priority is settling the boundary issues with its neighbours, enhancing diplomatic leverage and building a $10 million economy.

China is trying to improve international norms, technical standards and institutions through the BRI which covers more than 900 projects – 76 ports and terminals in 34 countries and special arbitration courts, about 80% which are contracted to Chinese companies. Whilst Prime Minister Modi is trying to divert the Western framework for reducing emissions in favour of human well-being within ecological limits.

And as the rivalry between the US, and Russia and China intensifies, India can play a stabilising role on agreed goals within the framework of a multi-stakeholder in the “Asian Century”.

Source: Neighbors move toward ‘Asian Century’ – ChinaDaily 28-29th April 2018