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.
The Economist produced a graph showing world GDP data and made the following points:
- India and China account for 65% of world growth
- Emerging markets contributions in 2016 were down to its lowest figure since 2008 – falling commodity prices would have been a factor
- Norway contributed less to global GDP with lower oil prices being prevalent.
- USA with increased government spending and greater export volumes improved its position
- Brazil has been in negative territory since mid 2014 – interesting point with significant government spending on hosting the Football World Cup and the Olympics.
Maybe a good starter for your classes asking the question who contributes most to world GDP?
Although the attention this morning was on the election of Donald Trump as US President the RBNZ cut the OCR to 1.75% with a mild easing bias of “numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly”.
It is expected that the OCR will remain at this level in the near future with inflation expected to be back within the 1-3% Policy Target Agreement (PTA) by the end of January next year – see graph from ASB Bank. The reason for this is that:
- Dairy prices have recovered considerably.
- The labour market is tightening.
- Growth is running at an above-trend pace.
- The OCR is already at an expansionary rate and the economy.
Could there be another cut in the OCR? There would be pressure if the following eventuated:
- there is a strengthening of the NZ dollar,
- increasing bank funding costs,
- any further weakness in inflation expectations,
- any deterioration in the global growth outlook.
The change of US Presidency will also be a wildcard over the longer term, with its mix of potential fiscal stimulus and trade protectionism. Trump has already signaled that he is not keen to sign TPP and he wants to reopen the NAFTA – North America Free Trade Agreement. Furthermore, he might take umbrage on the Chinese with their manipulation of the Yuan to advantage its exports and put a large tariff on its goods coming into the US. For New Zealand it may mean that they have to go down the bi-lateral agreement option in order to increase trade.
Other than the US election, Graeme Wheeler needs to be aware of the following:
- Theresa May has indicated she wants to trigger Article 50 by May 2017 – it is very unclear what the process will be and the negotiating strategy of both the UK and the EU. This could have implications for NZ trade.
- In China the increasing of centalised power of the President.
- China has a huge amount of corporate debt relative to GDP – see graph below.
- Brazil is still in recession
- Russia still has issues in the Middle East
The presence of technology in rural China is evidence that it is not just the booming cities that are the sources of growth. Furthermore, it suggests that inequality which has been symbolised by the ‘country versus city’ divide is now starting to decline.
Since the 1980’s China has gone through massive growth but it hasn’t been evenly shared. Income inequality is traditionally measured by using the Gini coefficient.
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.
Area between the Lorenz Curve and the 45° line ÷ Total area below the 45° line
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
In 2010 China’s Gini coefficient was 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour.
But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.
Below are some statistics showing the changes in trade between New Zealand and China.
On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China. However this is not the only first with regard to the relationship between the two countries. New Zealand was the first to negotiate a WTO accession agreement with China as well as the first to recognize China as a “market economy”. With this in mind, the Chinese government have acknowledged the support of New Zealand by granting them the first bi-lateral agreement with a western nation. The table below shows how the value of trade has increased as well as the ranking of particular goods and services.
Main goods exports to China:
- milk powder, butter, and cheese ($2,419 million)
- logs, wood, and wood articles ($1,551million)
- meat and edible offal ($1,211 million)
Main services exports to China:
- personal travel ($1,528 million)
- education travel ($673 million)
- transportation services ($161 million)
Source: Statistics New Zealand
China’s economic miracle is under threat from a slowing economy and a dwindling labour force. The FT investigates how the world’s most populous country has reached a critical new chapter in its history.
The abundance of cheap labour in China is coming to an end. Since the 1980’s low cost Chinese labour has supplied the developed world with cheap goods, which, to some extent, make up for stagnate wages. When China became more industrialised it grew very fast by importing foreign technology and employing capital and plentiful, cheap, unskilled labour from the rural areas. However, a point is reached when no more labour is forthcoming from the underdeveloped, or agricultural, sector and wages begin to rise. As well as wages increasing China has also experienced labour strikes and shortages, prompting many researchers to debate whether the Lewis turning point has been reached. Below is a very good video clip from the FT on this topic.
You might have heard of the marshmallow experiment that was carried out with young children. A child was offered a choice between one marshmallow immediately or two small marshmallows if they waited for a short period, approximately 15 minutes, during which the the person running the experiment left the room and then returned. Researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores.
Can this experiment be applied to societies today in that by deferring instant consumption (in order to save and invest) people will enjoy greater incomes as they age?
High saving rates = High investment rates
Jeff Sachs, of the Project Syndicate, recommends 4 actions that are needed to rectify this problem:
1. Global economic progress depends on high global saving and investment. In economic development, as in life, there’s no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards.
2. Saving and investment flows should be viewed as global, not national. China has a high savings rate which exceeds local investment needs therefore they can support the low income countries which have limited capital and a very young population. These countries can borrow from China to fund education, infrastructure development etc so to secure greater prosperity.
3. Full employment depends on high investment rates that match high saving rates. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.
4. High private investments by business depend on high public investments in infrastructure and human capital. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.
Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.
Investments such as low-carbon energy, smart power grids for cities, and information-based health systems depend on government and private sector partnerships. A lot of private investment needs tone backed by the government to get in the buy in from the private sector. Examples of this are the rail networks, aviation, semiconductors, satellites, GPS, hydraulic fracturing, nuclear power and the Internet would not exist but for such partnerships.
Our global problem today is that the world’s financial intermediaries are not properly steering long-term saving into long-term investments. Global investments are falling short of global saving at full employment which results in inadequate demand as short-term investments tend to be volatile to finance consumption and property.
Advice to China fails the Marshmallow Test
Some economists have stated that China needs to boost consumption (C) and let the renminbi appreciate to reduce exports. However this encourages overconsumption and underinvestment in a country that has high savings and industrial capacity which the global economy can make use of.
Central banks and hedge funds cannot produce long-term economic growth and financial stability. Only long-term investments, both public and private, can lift the world economy out of its current instability and slow growth. Jeff Sachs