Donald 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.
In the media a lot is spoken of a country’s trade deficit and the concern that it is borrowing from abroad to finance current purchases of goods and services. China’s surpluses have been a big talking point but it is Germany with a current account surplus since 2002 (introduction of the Euro) with a 2105 surplus of 8% of GDP which has taken the limelight – see graph from The Economist.
A lot of students taking the subject for the first time believe that a trade surplus is good and a trade deficit is bad. However, as in a lot of areas of economics, you can’t categorically say they are good or bad. For instance, a deficit might be caused by importing vast amounts of capital goods which will create value in the economy through jobs and goods which can be sold domestically or overseas. The capital goods can also increase the level of productivity and improve competitiveness of such goods. In some respects deficit countries can be better off than surplus countries, as they are consuming more goods that they are producing.
Is a trade surplus good or bad?
For a lot of countries the purpose of exports is to generate revenue so that they can buy imports of goods which they may not produce – or could produce but relatively less efficient. In China a surplus does keep the export sector industries employed but suggests there is a strong presence for saving or weak domestic demand. More balanced trade would increase the level of imported goods into a country and increase real incomes as the value of its currency rises. This will allow for more inflows of foreign capital from abroad stimulating growth in the domestic economy. It would help a sluggish world economy if surplus countries, like China and Germany, were to spend more on imports.
Reasons for Germany’s trade surplus.
There are three main reasons for Germany’s ongoing trade surplus:
- Since the advent of the Euro in 2002 its value has been very weak. This is because the Euro is valued in relation to the entire 19 country eurozone and given the economic condition of the other member states, Germany’s strength in trade is not significant enough to boost the currency. If Germany still had the Deutschemark today it would be no doubt stronger and therefore reduce export competitiveness. It has been calculated that the Euro gives Germany about a 20% price advantage compared to what it would have had if it was still using the Deutschmark and has the largest foreign exchange advantage of any country in the world, with the possible exception of China.
- Another reason is that the German government has been running a very tight fiscal policy and also keeping the wages levels down. In the wake of the worries over the eurozone, Germany slashed its public expenditure with reducing public infrastructure spending and been more focussed on running surpluses. This is all very well but they are taking money out of the system which leads to less demand in the global and European economy.
- The lower cost of imports of oil and gas increased the trade balance in 2015 by around 1.2%. Without the decline in oil and gas prices, the trade surplus would have fallen compared with the previous year.
Germany’s trade surplus is a worry for countries in the EU as well as overseas in that it is importing demand from other countries and reducing output and employment. This is especially prevalent when you consider that monetary policy in a lot countries has become ineffective. When this happens expansionary fiscal policy – dropping taxes and increasing government spending – is way of trying to boost demand but even though the fiscal position of the German economy is very healthy they are doing the opposite and being prudent. Germany is one of the few major economies in a position to easily and cheaply increase demand.
Given 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
Source: Parliamentary Library – Monthly Economic Review November 2016
It is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question.
Indicators that you might want to mention are below. Notice how low global interest rates are as economic conditions have warranted greater borrowing and spending in the world economy.
The New Zealand economy expanded by 2.8 percent over the year ended in the June quarter driven mainly by an increase in household consumption of 1.9 percent over the quarter, while exports of goods and services rose by four percent. The construction industry expanded by a further five percent in the quarter, while the retail, hiring, and real estate services industry expanded by 1.3 percent. The annual current account deficit totalled $7,383 million in the year ended June 2016, equivalent to 2.9 percent of gross domestic product (GDP).
The OECD in its September Interim Economic Outlook commented that the world economy remained “in a low-growth trap”, with GDP growth of 2.9 percent predicted for 2016, before rising slightly to 3.2 percent in 2017. Subdued economic growth is forecast for the major advanced economies, with growth for the United Kingdom expected to drop from 1.8 percent in 2016 to one percent in 2017. The Chinese economy is expected to grow by 6.5 percent in 2016, easing to 6.2 percent in 2017 as it moves from an investment-led to a consumption-led growth model. In mid-2009, the unemployment rate for both the Euro area and the United States was approximately ten percent. Since then the unemployment rate for the United States has fallen to 4.9 percent, while the unemployment rate for the Euro area peaked at over 12 percent in 2013, and currently sits just above 10 percent.
Low interest rates internationally have resulted in asset price inflation, particularly in share and house prices. Monetary policy can only do so much but with global interest rates at approximately zero there needs to be the support of the politicians to enlist a much more stimulatory fiscal policy.
Source: Monthly Economic Review: New Zealand Parliamentary Library
Below is a very good short video by Martin Wolf of the FT on Globalisation. He discusses the following and uses graphs to illustrate the decline of global trade and other related variables.
- Global trade has stalled in volume
- Cross border financial assets have declined
- Global foreign direct investment has fallen
- Trade liberalization has stopped and the DOHA round of trade talks has failed
Below is a very good summary of events in the UK over the last week. A major point is how the advice of leading economists and organizations was ignored with regard to the remain campaign. It seems that the electorate were driven by emotion and therefore the thought of independence and sovereignty become very powerful. This is the first time that any nation has decided to leave the bloc, and questions about other countries participating in similar referendums have already been posed.
But what does the leave campaign’s victory actually mean for the global markets? How will the United Kingdom re-form itself, especially in light of Scotland’s likely call for independence?
The impact of Brexit on the New Zealand economy should be limited when you consider the following statistics:
- 3.5% of total exports from NZ go to the UK – mainly sheep and wine.
- 2.7% of total imports from the UK to NZ – mainly transport goods
- 6.7% of all short-term visitor arrivals come from the UK
When the UK joined the EEC (as it was then know as) in 1973 there was a major shift away from trade with the Commonwealth. However New Zealand has been able to move away from the traditional dependency of the Commonwealth to become increasingly integrated to the Asia Pacific region.
Reserve Bank of New Zealand
The RBNZ is a good position even with a record low OCR of 2.25% which paradoxically is among the highest in the developed world. By not being aggressive with OCR cuts the RBNZ has the ammunition to stimulate aggregate demand further which is in contrast to the European Central Bank and the Bank of Japan who are in negative territory. With the turmoil in Europe over Brexit the US Fed will most likely hold off on a rate hike to ease the pressure on markets – it may even cut the US Fed rate.
Gold and Sterling – US$ rate
The graph below shows the reaction to the Brexit – GBP drops significantly against the US$ and gold, as a safe investment, appreciates in value. The uncertainty that surrounds Brexit saw more investors buy gold, which rose to about $1,315 an ounce on June 24th, up by 4.7% on the previous day. This was the largest increase since the global financial crisis in 2008. The rise was in stark contrast to the plunging pound, which tumbled to its lowest level in 30 years.
Below is video from the FT looking at Five Consequences of the UK’s exit form the EU.