Category Archives: Trade

Benefits of CPTPP to New Zealand.

On 23 January 2018, in Tokyo, the negotiations for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) were concluded. Its inception came from the TPP Agreement but that could not come into force until it was ratified by four other signatories, including the United States. After the election of Donald Trump the US made it clear that it did not intend to become a party to the Agreement. However the remaining eleven countries continued negotiations.

The eleven countries in the CPTPP are: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The economies  account for 13.5 percent of world GDP – worth a total of US$10 trillion. These are economically significant for New Zealand. The 10 economies:

• Are the destination for 31 percent of New Zealand’s goods exports (NZ$15.2 billion) and 31 percent of New Zealand’s services exports (NZ$6.9 billion) annually (year to the end of June 2017).

• Include four of New Zealand’s top 10 trading partners (Australia, Japan, Singapore, and Malaysia).

• Include four countries with which New Zealand has never had a free trade agreement (Japan, Canada, Mexico and Peru). We export over NZ$5.5 billion of goods and services to these four countries.

• Are the source of 65 percent of total foreign direct investment in New Zealand (as of March 2017).

The CPTPP will provide significant benefits for New Zealand goods exporters across a range of sectors. Tariffs will be eliminated on all New Zealand’s exports to CPTPP economies, with the exception of beef into Japan; and a number of dairy products into Japan, Canada, and Mexico, where access will still be improved through partial tariff reductions and duty-free quotas.

Source: New Zealand Foreign Affairs and Trade.

Economic Theory v Economic Reality

Most theories in economics rest on the premise that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an introductory economics textbook, even though the assumptions behind those diagrams virtually never hold true in the real world.

Below is a table that I found in James Kwak’s book “Economism”. It takes theories found in most introductory economics textbooks and suggests what actually might happen to these theories in the real world.

 

Holiday reading for the beach

That time of year when I take off to the beach out of internet range – here are some economics books that I recommend. I should be back on the blog on Monday 8th January – have a good Christmas and New Year. Reviews are from Amazon.

Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits.

In order to illuminate the fallacies of economism, James Kwak first offers a primer on supply and demand, market equilibrium, and social welfare: the underpinnings of most popular economic arguments. Then he provides a historical account of how economism became a prevalent mode of thought in the United States—focusing on the people who packaged Econ 101 into sound bites that were then repeated until they took on the aura of truth. He shows us how issues of moment in contemporary American society—labor markets, taxes, finance, health care, and international trade, among others—are shaped by economism, demonstrating in each case with clarity and élan how, because of its failure to reflect the complexities of our world, economism has had a deleterious influence on policies that affect hundreds of millions of Americans.
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The Great Leveler. Are mass violence and catastrophes the only forces that can seriously decrease economic inequality? To judge by thousands of years of history, the answer is yes. Tracing the global history of inequality from the Stone Age to today, Walter Scheidel shows that inequality never dies peacefully. Inequality declines when carnage and disaster strike and increases when peace and stability return. The Great Leveler is the first book to chart the crucial role of violent shocks in reducing inequality over the full sweep of human history around the world.

Ever since humans began to farm, herd livestock, and pass on their assets to future generations, economic inequality has been a defining feature of civilization. Over thousands of years, only violent events have significantly lessened inequality. The “Four Horsemen” of leveling―mass-mobilization warfare, transformative revolutions, state collapse, and catastrophic plagues―have repeatedly destroyed the fortunes of the rich. Scheidel identifies and examines these processes, from the crises of the earliest civilizations to the cataclysmic world wars and communist revolutions of the twentieth century. Today, the violence that reduced inequality in the past seems to have diminished, and that is a good thing. But it casts serious doubt on the prospects for a more equal future.
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Straight Talk On Trade. Not so long ago the nation-state seemed to be on its deathbed, condemned to irrelevance by the forces of globalization and technology. Now it is back with a vengeance, propelled by a groundswell of populists around the world. In Straight Talk on Trade, Dani Rodrik, an early and outspoken critic of economic globalization taken too far, goes beyond the populist backlash and offers a more reasoned explanation for why our elites and technocrats obsession with hyper-globalization made it more difficult for nations to achieve legitimate economic and social objectives at home: economic prosperity, financial stability, and equity.

Rodrik takes globalization’s cheerleaders to task, not for emphasizing economics over other values, but for practicing bad economics and ignoring the discipline’s own nuances that should have called for caution. He makes a case for a pluralist world economy where nation-states retain sufficient autonomy to fashion their own social contracts and develop economic strategies tailored to their needs. Rather than calling for closed borders or defending protectionists, Rodrik shows how we can restore a sensible balance between national and global governance. Ranging over the recent experiences of advanced countries, the eurozone, and developing nations, Rodrik charts a way forward with new ideas about how to reconcile today’s inequitable economic and technological trends with liberal democracy and social inclusion.

Observatory of Economic Complexity (OEC) – great graphics on global trade

I picked up the OEC site from Michael Cameron’s blog ‘Sex, Drugs and Economics’. The Observatory of Economic Complexity is a tool that allows users to quickly compose a visual narrative about countries and the products they exchange. It was Alexander Simoes’ Master Thesis in Media Arts and Sciences at the MIT Media Lab. The project was conducted at The MIT Media Lab Macro Connections group. Alex’s Advisor was César A. Hidalgo, principal investigator of Macro Connections. Since its creation in 2010, the development of The Observatory of Economic Complexity has been supported by The MIT Media Lab consortia for undirected research.

The graphics on each country and products are superb and include:

  • Exports
  • Imports
  • Trade Balance
  • Destinations

It also includes Economic Complexity Index which measures the knowledge intensity of an economy by considering the knowledge intensity of the products it exports. Below are some images on New Zealand trade.

New Zealand Exports – 2015

NZ Exports 2015.png

New Zealand Imports – 2015

NZ Imports 2015

China’s changing trade dynamics

On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China, an economy which in the 1970’s was one of the poorest countries in the global economy. Today China is the world’s second largest economy and the fastest growing at a rate around 7% per year. However China’s trade composition has changed significantly over the years as its economy has developed. Two main trends stand out.

The decline in importance of primary goods (mainly food) as a proportion of China’s total commodity trade.  China’s exports have changed from being dominated by labour-intensive manufactured products in the mid 1990’s to more sophisticated manufactures today. 1994 – 40.6% of exports were miscellaneous manufactured articles. 2014 45.8% of exports were machinery and transport equipment.

A changing comparative advantage

A country’s comparative advantage refers its production of a good or service at a lower opportunity cost than another. Instead of every country trying to produce a wide of goods , countries can grow faster by specializing in the goods they can produce most cheaply and trading for others. Many Asian countries – Japan, Korea, Taiwan – have gone through 4 stages (as shown below) of development through a specialization index. It shows the first stage is the Developing Country stage, where Primary commodities are more competitive than both Other manufactures and Machinery. The second and third stages are the young and mature NIEs (newly industrialised economies) respectively, where for both stages Other manufactures is the most competitive sector, but the ranking of Other manufactures vis-à-vis Machinery is opposite. At the fourth stage – the pinnacle of trade structures – Machinery is most competitive.

Stages of Development.png

*NIE = Newly Industrialised Economy

A country’s trade structure can be classified into any of these 4 stages according to the relative magnitudes of the country’s specialisation indices across 3 sectors:

Three Sectors - China Trade.png

The figure below illustrates the evolution of China’s trade structure during 1984-2014. It can be seen that China became a young NIE in 1990 – when the specialisation index of Other manufactures surpassed that of Primary commodities – and then a mature NIE in 1999 – when Machinery passed Primary commodities. This pattern is consistent with the changing composition of China’s exports, from labour-intensive products to a more sophisticated mix led by various types of machinery and equipment.

China change in specialisation.pngImplications for the global economy
China’s rapid rise poses both challenges and opportunities for other countries as they are exposed to increased competition at home and abroad. For many firms in rich countries, intensifying competition from China’s exports has reduced demand for the goods they produce, with a corresponding decline in workers employed. Such changes in the global economic environment affect the allocation of factors of production and cause sectoral productivity fluctuations, as well as driving changes in comparative advantages among nations. Trade between developing (e.g. China) and developed economies (e.g. US) has been on the rise. Developed countries with high wages and expensive welfare programmes are having trouble coping with the effects of developing countries becoming major global players. It is estimated that 2.0-2.4 million people in the US lost their jobs as a result of increasing Chinese import competition during 1999-2011.

Source: China’s changing comparative advantage: Trends and implications by Murat Ungor. EcoNZ@Otago – August 2016

 

What is the Trade Weighted Index?

Trade Weighted Index (T.W.I)

  • An index that measures the value of $NZ in relationship to a group (or “basket”) of other currencies. The currencies included are from NZ’s major export markets i.e. Australia, USA, Japan, Euro area, UK and China. – $A, $US, ¥, €, £ RMB
  • Each of the currencies included in the TWI is “weighted” according to how important exports to that country are ( = % of total exports)
  • From the TWI we can see if the $NZ has appreciated or depreciated against our major trading partners currencies overall.

TWI - NZ 17.png

The interpretation of the effective exchange rate is that if the index rises, other things being equal, the purchasing power of that currency also rises (the currency strengthened against those of the country’s or area’s trading partners). That will reduce the cost of imports but will undermine the competitiveness of exports.

TWI NZ

Internationally, global growth is continuing to improve, suggesting that excess global supply is easing. However, offshore political uncertainty has grown and continues to cast a shadow on NZ’s inflation outlook. Further, the NZ Trade Weighted Index (TWI) is hovering around 78 again, in part due to NZ economic fundamentals but also in part due to the above offshore political events.

Source: ASB Bank

 

 

Africa's Resource Curse

Below is a link to an excellent podcast from the BBC World Service. I have blogged on the resource curse before and the falls in commodity prices – oil and mining – over the last year have affected the sub-Saharan African countries that are dependent on their primary industries. There is also mention of GDP being a stupid model. Worth a listen – click on link below.

Africa: The Commodity Curse Returns

In the balance - Resource Curse

For most economies that have natural endowments like oil (Nigeria) or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trap in which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy.

Click here for more on the Resource Curse from this blog

Teaching why the Balance of Payments equals zero.

A HT to colleague Nick Lloyd for this great explanation of the relationship between the current account and the capital and financial accounts. In theory the balance of payments should equal zero and this is one area that students find hard to comprehend. Hope you find it as useful as I did.

The Relationship between the Current Account and the Capital and Financial Account

A few starting points:

  1. Gross Domestic Product (GDP) = C + I + G + (X – M)
  2. Gross National Product (GNP) = GDP plus Net Income (Income Credits (Yc) – Income Debits (Yd))
  3. Saving/Investment Gap (S – I) = Balance on Capital and Financial Account (Capital Outflows (Ko) – Capital Inflows (Ki))
  4. Current Account Balance = Trade Balance (X – M) + Net Income (Yc – Yd)
  5. National Savings = GNP – (Private Spending (C) + Government Spending (G))

Now:

GNP                                      =               GDP + (Yc – Yd) =  C + I + G + (X – M) + (Yc – Yd)

GNP – (C + I + G)                 =               (X – M) + (Yc – Yd)

GNP – (C + G) – I                 =               (X – M) + (Yc – Yd)

S – I                                    =               (X – M) + (Yc – Yd)

Balance on Capital & Financial Account               =               Balance on Current Account

 

Another way to arrive at the same conclusion:

Assuming freely floating exchange rate is in equilibrium:

Demand for Currency = Supply of Currency

Demand comes from:     X + Yc + Ki

Supply comes from:        M + Yd + Ko

Thus when the forex market is in equilibrium:

Demand                         =               Supply

X + Yc + Ki                    =               M + Yd + Ko

(Ki – Ko)                        =               (M – X) + (Yd – Yc)

Balance on CFA               =               Balance on Current Account

 

So, if as a nation you earn more than you spend (current account surplus), you are in effect lending to the rest of the world (exporting savings) by accepting IOUs in the form of your increased holdings of foreign assets (shares, land, government bonds, etc.)

If as a nation you spend more than you earn (current account deficit), you must borrow from the rest of the world (import savings) in the form of increased foreign holdings of your domestic assets (shares, land, government bonds, etc.)