Category Archives: Trade

US China Trade War – end in sight?

From The Economist YouTube channel – a good overview of the US China Trade War. After joining the WTO, China became an economic superpower. But people had expected the country to also become more like a Western capitalist economy. That didn’t happen. America now claims that China achieved its growth by not playing fair. Are those claims justified?

The Trump administration has been using tariffs or taxes on imported goods to try to force the Chinese to change their ways. In July 2018 America imposed tariffs of 25% on $34bn worth of Chinese products. That almost doubled the average tariff rate on Chinese imports from 3.8% to 6.7%. And it’s American firms that have to pay that tax. But with every increase from America, came an increase from China. Since the start of the trade war China has more than doubled its average tariff rate. America’s has tripled. The fight has become overtly political because China’s tariffs are hitting President Trump’s voter base. Many counties where Trump won in the 2016 election were here in the Great Plains and these are the counties most affected by China’s tariffs.

Resource Curse – but what about ‘Trade Partner Curse’ – New Zealand’s trade with China.

I have blogged quite a few times about the ‘Resource Curse’ but what about the ‘Trade Partner Curse’? New Zealand has been renowned for its primary exports but is it a concern that a third of every dollar earned in the primary sector comes from China. Dr Robert Hamlin (University of Otago) stated that based on experience no more than 20% of revenue should be earned from one source to ensure a buffer against changes in terms of trade and the economic conditions in the favoured country of destination.

Higher Terms of Trade – would be beneficial because the country needs fewer exports to buy a given number of imports.
Lower Terms of Trade – country must export a greater number of units to purchase the same number of imports.

New Zealand which is traditionally dependant on primary exports usually faces instability which arises from inelastic and unstable global demand especially from China. By relying on the Chinese market, New Zealand exposes itself to greater risk of recessions in that market which may reduce in the demand for New Zealand products. Having numerous export markets means that there isn’t such exposure to economic volatility. Furthermore, countries that are commodity dependent or have a narrow export basket usually faces export instability which arises from inelastic and unstable global demand. The 2018-19 Ministry for Primary Industries’ Situation and Outlook report stated that from the year to June 2019 – total primary exports = $46.3bn but when you look at the breakdown from which country you get the worrying sign that more trade is going to China and less to other countries – essentially China is crowding out other markets:

China – $14.4bn
Australia – $4.5bn
USA – $4.2bn
EU – $3.1bn
Japan – $2.6bn

Source: https://oec.world/en/profile/country/nzl/

In 2017 China accounted for 24% of all New Zealand’s trade exports (see above). China also was the top export destination for New Zealand primary sector – 24% of primary sector exports went to China – by value:
25% of dairy,
43% of forestry,
31% of seafood and
21% of red meat.

China is taking a long-term approach to secure food supplies for its growing population by also buying NZ processing companies, giving it control of the supply chain. The reliance on China comes with risks that its economy remains strong. A downturn in their economy could have implications for New Zealand’s primary sector so it is important to have a diversified portfolio.

AS Revision – TWI and Floating Exchange Rates

Been doing some revision courses and today we looked at the TWI and floating exchange rates. The exchange rate measures the external value of the NZ$ in terms of how much of another currency it can buy. For example – how many pounds, US dollars or Euros you can buy with NZ$1000. The daily value is determined in the foreign exchange markets (FOREX) where billions of $s of currencies are traded every hour.

A large percentage of the dealing in currencies is purely speculative, that is to say, people trading dollars, yen, euros and sterling seeking to make a profit (or capital gain) from small fluctuations in currency values.

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. – $A, $US, ¥, €, £. 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.

Free, Fluctuating, or Floating Exchange Rates
In a free market the rate of exchange is determined by the market forces of supply and demand. Where these conditions apply the exchange rate is said to free, fluctuating or floating. Therefore the following have a great impact on the rate of exchange in a free market:

An increase in the demand for the $NZ will result from more people wanting get or buy $NZ.

  • Increase in the value of exports
  • Increase in tourists traveling to NZ
  • Increase in foreign investment in NZ (buying assets / companies / depositing savings)
  • Increase in NZer’s taking out loans overseas

An increase in the supply for the $NZ will result from more people wanting get or buy other currencies (as they have to supply $NZ to the market to get the other currencies)

  • Increase in the value of imports
  • Increase in NZer’s travelling to other countries
  • Increase in NZ investment overseas
  • Increase in NZer’s repaying loans made overseas

Other Factors Effecting $NZ with a Floating Exchange Rate

  • Relative Inflation Rates e.g. if NZ’s inflation rate is higher than other countries then the price NZ’s exports will become relatively more expensive and NZ will lose competitiveness and exports will fall.
  • Income of countries NZ trades with e.g. Australia is in a recession – NZ exports
  • Tastes and Preferences e.g. world news, current events, fashion, trends, popularity effecting NZ’s exports e.g. Sept 11th and an increase in tourists to NZ
  • Access to Overseas Market e.g. trade restrictions (protectionist policies e.g. tariff, quotas and regulations) placed on NZ exports by other countries governments.
  • Relative Interest Rates e.g. if interest rates in NZ are higher than in other countries, then this will attract people to save in NZ banks, creating demand for the $NZ.

China: currency manipulator or market forces?

A good summary from the FT – see video below. The Renminbi is permitted to trade 2 per cent on either side of a daily midpoint set by the People’s Bank of China (PBOC). This suggests that the PBOC still has significant control of the renminbi. Basically at 9.15am the Peoples Bank of China (Central Bank) and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$. It is then permitted to trade 2 per cent on either side of the midpoint rate. The midpoint set by the PBOC on Monday of Rmb 6.9225 was the lowest since December, when trade tensions were last at fever pitch. The PBOC blamed the tariffs and trade protectionist measures on Chinese goods as the reason why the exchange rate has depreciated.

But is China a currency manipulator? According to the US Treasury a country is a currency manipulator when it does the following 3 things

  • A significant bilateral trade surplus with the US.(Check! China’s got that.)
  • A material current account surplus of more than 3% of GDP.(China does not have that.)
  • Persistent one-sided intervention in its currency market.(China’s move on Monday doesn’t fit this bill, so no.)

But isn’t downward pressure on the Renminbi just part of the what happens to a currency when its economy starts to slow and it’s selling fewer exports.

Winners with a cheaper yuan
1. Chinese exporters are more competitive abroad.
2. Foreign consumers of Chinese products – imported products are more affordable.
3. China’s case for becoming a reserve currency could be bolstered by letting markets determine the exchange rate.

Losers
1. Chinese companies that have debt denominated in dollars, or buy things in dollars
like Chinese airlines, or other businesses that rely on imported oil.
2. Companies that compete with Chinese firms – including those in neighboring countries.
3. Companies that depend on exports to China – like the makers of luxury goods and mining companies.
4. Anyone worried about weak inflation in the U.S. or Europe

Sources: FT and Business Insider

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.