Category Archives: Trade

The pros and cons of globalisation

The rhetoric around globalisation has been very much how beneficial it is to the global economy. Economists in general have been very much in favour of the interconnectedness of economies making goods and services more competitive to the consumer. So what are the pros and cons of globalisation?

Trump – why is he really putting tariffs on steel and aluminum?

Donald Trump announced on 2nd March that the US will impose a 25% tariff on steel imports and a 10% tariff and aluminum imports. A tariff protects domestic firms against overseas competition and raises revenue for the government. A tariff is a tax placed (or levied) on imports that raises the price of imported goods thereby making locally-made products relatively more price competitive. This may protect jobs and/or improve the balance of payments but it can cause resentment overseas. High tariffs on imports may cause a country’s trading partners to retaliate and follow suit by placing tariffs on exports of foreign made goods. Notice on the graph below how a tariff reduces the quantity of imports from 6m bottles to 2m bottles and the domestic supply increases from 2m to 4m bottles.


For many years US producers have found it hard to compete with cheap imports and this has led to many steel plants closing down with thousands of workers losing their jobs. Two main factors have caused this:

  1. Global steel and aluminum production has increased significantly over the last 15 years which has created excess capacity.
  2. Chinese firms have been widely accused of pricing below the cost of production in order to get rid of excess stock

Previous Tariffs – nothing new here.

The US is not the only country or group to impose tariffs on foreign products. The EU has done the following:

  • Put a tariff of 28.5% on certain types of steel pipes and tubes made in China after it was found that the prices were artificially low.
  • Imposed 43 anti-dumping and anti-subsidy measures, 20 of which are on products originating from China

The Obama Administration also was active in counteracting alleged Chinese dumping.

  • March 2016 – they put a 265.79% on imports of cold-rolled steel, used to make auto parts, appliances and shipping containers, from seven countries including China.
  • May 2016 – to clampdown on the glut of steel imports the US imposed anti-dumping and anti-subsidy duties of up to 450% on corrosion-resistant steel form China.

What is the difference between previous tariffs and Trumps announcement?

The difference here is that Trump’s tariffs would apply to all products rather than targeting particular areas of steel and aluminum production. Trump seems to be threatening action against any nation that runs trade surpluses with the United States. He tweeted last week:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,”

“Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”

The EU maintain that the key problem is as mentioned above is global over capacity caused by non-market production – producing the output even though there is no demand for it. They are of the belief that this can be dealt with at the source – i.e. those countries over producing. The oil industry seems to work in a similar way with OPEC where production can change with negotiations between oil producing countries. However if a trade war does eventuate Europe has warned the US to expect imports tariffs on American icons like Harley-Davidson, Levi’s jeans and Kentucky bourbon.

China is not the big importer into the US

It seems that in a lot of his communication he singles out China as being the problem especially with the trade deficit the US has with that country. However China only supplies 2.9% of US steel imports – see below:

Top steel exporters to the United States with their corresponding percentage of total U.S. steel imports:

 

Canadian steel producers, like their U.S. counterparts, have been complaining about Chinese firms dumping products in the domestic market. Sensitive to these complaints, the Canadian government has long imposed protective duties on some Chinese exports, such as hot-rolled steel plate. On Thursday, the Canadian International Trade Tribunal indicated that these duties would remain in place. On this issue, at least, the United States and Canada should have been able to find common ground. Instead, Canada, like the E.U., is threatening to retaliate against Trump’s plan.

 

 

Source: Wood Mackenzie

Why is Trump really doing this?

As with any politician it is all about popularity. Part of his rhetoric on the election campaign was to make America great again and to revive the heavy industry in areas such as Pennsylvania (steel production) a normally very safe seat for the Republicans – in fact the Democrats didn’t even field a candidate in the last election. However, Trump voters are disappointed with his presidency and, with the Democrats fielding a candidate, the forthcoming special election in western Pennsylvania is too close to call. An upset victory by the Democrats, or even a narrow loss, would make the midterm elections a very close contest as the Democrats try to retake control of the House of Representatives.

The big question is will Trump go ahead with the tariffs or back down as he has done with immigration etc.

Source: New Yorker – Will Trump Really Start a Broad Trade War? by John Cassidy

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