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Will there be a recovery in global dairy prices?

April 9, 2017 Leave a comment

Dairy prices fell dramatically in 2014 and 2015, prompting the RBNZ to reverse 2014 OCR increases in 2015. Average prices on the GlobalDairyTrade auction fell by 38% in 2014/2015 and 20% in the 2015/2016 to mid-March.

Inconsistent Chinese demand and increased European/US dairy supply causing the perfect storm of plummeting whole milk powder prices. Thankfully, for dairy farmers and the NZ economy dairy prices recovered in late 2016 but can it be maintained into 2017? Here are some reasons why prices may recover:

  1. EU production is slowing down
  2. New Zealand production is also likely to fall
  3. Demand from China is likely to increase
  4. ASB rural economist Nathan Penny noted three things that would impact the price of milk. One as the fact that milk production was held back before the removal of annual quotas at the end of March 2015 as countries avoided paying penalties associated with producing above quota. Two, after the April removal of quotas, production surged in the EU with April production rising over 3% on a month-by-month basis. Three that post-quota surge has now passed, with production growth slowing, particularly since July, as farmers have struggled with low milk prices.

Once supply is more aligned to demand, global prices are expected to rise again. Europe collectively is the world’s largest dairy exporter, accounting for nearly a third of global export sales. EU exports increased by 6% in milk equivalent last year.

GDT 2012-26.png

 Sources: National Business Review and PWC

Categories: Growth, Trade Tags:

Brexit and trade – UK can learn from New Zealand’s experience

March 17, 2017 Leave a comment

With the departure of the UK from the EU there have been many questions asked about the future of UK trade. No longer having the free access to EU markets both with imports and exports does mean increasing costs for consumer and producer.

New Zealand’s Experience

A similar situation arose in 1973 when the UK joined the then called European Economic Community (EEC). As part of the Commonwealth New Zealand had relied on the UK market for many years but after 1973 50% of New Zealand exports had to find a new destination. However with the impending loss of export revenue New Zealand had to make significant changes to its trade policy. In 1973 the EEC took 25% of New Zealand exports and today takes only 3%. Add to this the oil crisis years of 1973 (400% increase) and 1979 (200% increase) and protectionist policies in other countries and the New Zealand economy was really up against it.

What did New Zealand do?

1. It negotiated a transitional deal in 1971 with agreed quotas for New Zealand butter, cheese and lamb over a five-year period, which helped to ease the shift away from Britain.

2. New Zealand was very active in signing trade deals of which Closer Economic Relations with Australia was the most important in 1983. The other significant free trade deal was with China in 2008. Below is a list of New Zealand’s current free trade deals and a graph showing the changing pattern of New Zealand trade:

NZ Free trade Deals

NZ exports goods 1960-2015.png

With brexit around the corner it will be imperative that the UK starts to develop trade links with non-EU countries of which New Zealand might be one. The UK is the second largest foreign investor in New Zealand and its fifth largest bilateral trading partner.

NAFTA – Positives and Criticisms

February 26, 2017 1 comment

NAFTA took effect in 1994 during the Clinton administration although he had to rely on support from the Republicans in the House – 60% of congressional Democrats voted against NAFTA. NAFTA got rid of tariffs on more than half of its members’ industrial products and by 2009 the deal eliminated tariffs on all industrial and agricultural goods.

Positives of NAFTA

  • American corporates believed the deal would cut labour costs and therefore increase efficiency and international competitiveness.
  • American consumer would also benefit from lower prices.
  • It would raise Mexico’s living standards especially in the north.
  • Trade between the USA and Mexico has risen 1.3% in 1994 to 2.5% in 2015
  • Mexico’s real income has risen – $10,000 in 1994 to $19000 in 2015
  • Less Mexicans are migrating to the USA – 500,000 a year to virtually nothing.

Criticisms
Mexican incomes are no better, as a share of those in the US, than they were in 1994.  Americans are slightly better off. NAFTA has caused significant job losses in the manufacturing industry.

However there are some unseen circumstances which have affected the deal.

1. The crisis of the Mexican Peso in 1994-95  – Zapatista rebels launched an uprising in Southern Mexico and the leading presidential candidate was assassinated. Worried about stability, foreign investment began to flee the country. It was eventually brought under control by a loan from the US government.

2. September 11th – this terrorist attack increased the cost of moving goods and people

3. The rapid growth on the Chinese economy which accounted for more than 13% of global exports and 25% of global manufacturing value-added. This puts a lot of pressure on global supply chains.

Have job losses been a result of NAFTA?

Brad DeLong (University of California) estimated that NAFTA could be blamed for only 0.1% of job losses in the US economy. This equates to fewer jobs than the US economy adds in a typical month. But to be realistic job losses would have increased without NAFTA for the following reasons:

1. the advances in technology would see labour being substituted
2. the strong US dollar would make US exports less competitive and thereby making overseas production attractive
3. Transport and communications improvements have made overseas production also attractive

Source: The Economist – 4th February 2017
Below is Paul Krugman on Bloomberg news. He talks of the poor performance of NAFTA for Mexico in that the country hasn’t developed as a whole. Some of the northern states have done well but southern Mexico is still very poor.

 

Categories: Trade Tags: , ,

USA and China Trade – will the USA create more jobs?

February 13, 2017 Leave a comment

USA China Trade Deficit.pngDonald Trump appointed Peter Navarro as the head of the newly created National Trade Council – it has been his anti-China stance outlined in his book ‘Death by China’ that has led to his surprise hiring by Trump. The book talks of the economic and military rise of China and the demise of the US manufacturing industry unable to compete with the Chinese sweatshops.

However a lot of the criticisms that Navarro has pointed at China have been quite valid.

1. Currency – the intervention on the foreign exchange market to keep their currency weak so improving the competitiveness of exports.
2. Intellectual property – forcing American firms to hand over intellectual property as a condition of access to the Chinese market.
3. Pollution – Chinese firms pollute the environment and have weak environmental controls on industry.
4. Working conditions – these are far worse than what is the law in most industrialized countries.
5. Export subsidies – government assistance help reduce the cost and ultimately the price of exports from China.

In 2006 he estimated that 41% of China’s competitive advantage over the USA in manufacturing came from unfair practices like those above and when China joined the WTO in 2001 the trade deficit with the USA ballooned at the same time millions of manufacturing jobs disappeared. The deficit though was funded by the Chinese and it was a consequence of the Chinese buying US Treasury bills – to put it simply the Chinese funded US consumers to buy Chinese products. Niall Ferguson refers to the relationship as Chimerica – the two are interdependent in that the USA borrows off the Chinese and then uses that money to buy Chinese products.

Navarro believes that with China adhering to global trade rules the deficit in manufacturing will decrease and manufacturing jobs will return to the US. However when jobs return they are not the same as they were in previous years as it is highly likely that productivity/technology has refined the production process. Research has also suggested that when the trade deficit with China increased (1998-2010) the loss of manufacturing jobs only rose slightly 2.5m to 2.7m. One wonders what Navarro will do in the coming months?

Sources: The Economist, The Ascent of Money by Niall Ferguson.

Categories: Trade Tags: ,

Importance of Tourism to New Zealand

November 16, 2016 Leave a comment

nz-short-term-arrivalsGiven the growing importance of tourism to the NZ economy, there is a risk that the latest earthquake could adversely impact visitor arrivals. However, looking at the 2010/11 earthquakes, the long-term impact appears to be limited (see graph from ASB Bank).  It is estimated that the impact on visitor arrivals is likely to be small in comparison to the previous quakes, though Wellington through to North Canterbury are likely to see a reduction in visitors. Spare a thought for  Kaikoura, the whale-watching capital, which has experienced a lot of damage and currently has no access routes.

Unlike other sectors  which produce material goods, tourism encompasses a range of industries and is based on characteristics of the consumer, rather than what is being produced by the producer. Feeder industries into the tourism sector include:

Accommodation – Transport – Retail Trade – Food and Beverages – Car Hire – Tourist Sites

Tourism spending – year ended March 2016

  • Domestic = $20,213m ($15,361m spent by households $4,852m spent by business and government)
  • International = $14,486m ($2,747m from international students)

Total = $34,699m

One significant point from the data was that tourism revenue surpassed export revenue from dairy products.

Contribution of Tourism to Gross Domestic Product (GDP) 

  • Direct contribution – $12,873m = 5.6 % of GDP.
  • Indirect Contribution (supplying of goods and services to tourism sector) – $9,815m = 4.3% of GDP
  • Total contribution = $12,873m + $9,815m = $22,688m = 10% of GDP

Employment – the tourism sector is quite labour intensive, with:

  • People employed 188,136 = 7.5 % of total employment.
  • People indirectly employed = 144,186 = 5.7% of total employment.
  • Total 332,322 = 13.2 % of total employment

nz-tourist-figures

Source: Parliamentary Library – Monthly Economic Review  November 2016

Categories: Trade Tags: , ,
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