Can globalisation help tame inflation?

Supply chain disruptions and large fiscal deficits have been part of the cause of the inflationary problems that have been prevalent in the global economy. Increased aggregate demand from government spending accompanied by supply constraints have seen prices soar. The IMF blog looked at how we should go back on history and look at how globalisation in the past has offered an antidote to inflationary spirals.

In the 1970’s technology improved global supply chains with the introduction of the shipping container which reduced transport costs of goods. Policymakers like the former US Fed Chairman Alan Greenspan see the relationship between globalisation and innovation a transition to low inflation. This idea has been embraced by current Fed Chairman Jerome Powell who talks of not only technology but demographic factors that bring about sustained disinflation. Trade liberalisation had a part of play here with the role of the General Agreement on Tariffs and Trade (GATT) – now know as the World Trade Organisation (WTO) – providing the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce – see graph.

Modern inflation targeting by central banks (1-3% in New Zealand) also brought inflation under control as countries established a process that would allow them to attract capital flows or to globalise further. New technologies will produce better growth and increase the potential capacity of the economy (Production Possibility Curve shifts to the right) but requires a lot of cross-border co-operation. Some countries pursue costly ‘friendshoring’ strategies of steering trade to friendly nations and regimes while attempting to hobble rivals. In particular big economies look to protect strategic vital and strategic resources thereby preventing global economic growth. All of this may seem an easy solution to tame inflation but the reality is there are many variables that influence the inflation figure within countries.

Source: IMF Blog: In defense of globalisation

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Has the WTO done enough to help developing countries?

Below is a good clip from Al Jazeera about the problems facing developing economies and it asks the question has the WTO done enough to assist poor nations. It goes back to the WTO: Doha Round of trade talks in 2001 which aimed to lower barriers to trade and therefore facilitate greater global trade but agricultural subsidies and tariffs remain unresolved. The issues seem to be between developed v developing countries and the changing nature of the world economy since 2001.

Removal of subsidies and tariffs to boost NZ farm incomes

With most of the attention has been focused on the TPP the 161 countries of the World Trade Organisation had set a deadline of the end of July to agree on a “work programme” to substantially complete the Doha round of global trade talks later this year.

Launched in 2001, the Doha round was to pick up where the Uruguay round of global trade liberalisation left off six years earlier. The deadlock in negotiations is ultimately down to a belief that the EU and the US and the large developing countries of China, Brazil and India have each given up more than its fair share in liberalising agricultural trade and the other side should do more.

Subsidies are still a problem.
Although subsidies have been used sparingly by governments in the past few years as international commodity prices rode high, they were used by the US and the EU during the depths of the global financial crisis in 2009 when prices fell sharply before rebounding. China, in its most recent reporting to the WTO, also indicated it had increased trade-distorting agricultural subsidies to a record $18 billion in 2010.

There is still no rule in the WTO that export subsidies are illegal. The main objective is reforming people’s legal obligations so you have much fairer and open agricultural trading regime. Frustrated with the lack of progress at the WTO many countries have in recent years have looked to bilateral or regional trade talks for gains from trade. These deals have tended to bring about bigger tariff cuts in key trading partners’ markets more quickly than had they waited for consensus to be reached among the 161 countries of the WTO. However as far as the Doha Round is concerned it has broken the momentum of negotiations even though it does offer a more inclusive liberalisation of international trade.

The effect of an intervention price on the income of EU farmers is shown on the graph below. 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 Common Agricultural Policy (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.

What is the WTO?
The World Trade Organisation is the rule-maker for trade between nations and the policeman for those rules. Comprising 161 countries, the Geneva-based body is the successor to the General Agreement on Trade and Tariffs (GATT) set up in the aftermath of World War II with the purpose of limiting the sorts of trade barriers which prolonged the Depression of the 1930s.

The GATT was replaced by the WTO in the mid-1990s after the Uruguay round of global trade reforms. A Government report in 2002 estimated the Uruguay round would have added $9 billion to NZ farmers’ incomes in its first decade, mainly through improved access for exports of lamb, dairy and beef to the European Union and the United States.

The WTO was set up in 1995 to finish off the work of the Uruguay round in eliminating trade barriers although the Doha round, through which this was to be achieved, was not launched until 2001 and has made little in the way of breakthroughs.
As the global trading system’s policeman the WTO also adjudicates on trade disputes and has been used by NZ to get access to the Australian market for apples, South Korea for beef and Canada for dairy products.

Source: Farmers Weekly in New Zealand – 30th July 2015

NZ winemakers looking to protect local brands.

In yesterday’s Wall Street Journal there was an article on New Zealand Wine and Protectionism. With wine consumption increasing significantly in countries like China and Russia there is the fear amongst New Zealand growers about knockoff wines posing as premium labels exported from regions like Marlborough and Central Otago. NZ winemakers are lobbying for the same legal protection that French producers won for Champagne 20 years ago which prevents winemakers in other countries using the names of local brands. The WTO recognise geographical indicators and this comes under its protection.

The value of New Zealand’s wine exports has risen 33% to 1.2 billion New Zealand dollars (US$983.4 million) since 2008, with shipments to China alone jumping tenfold to 2.2 million liters. That is offsetting flatter growth in traditional markets such as Australia, the U.S. and the U.K., which remain the biggest buyers of New Zealand wine.

“The New Zealand wine industry has raised concern with me about the possible growth of counterfeits in our export markets,” Craig Foss Commerce Minister.

How the container revolutionised the global supply chain

The Economist and the Financial Times have recently looked at the impact of the container and container ships. With the first journey of a container ship in 1956 the cost for tonne of cargo was $0.16 per tonne to load—compared with $5.83 per tonne for loose cargo on a standard ship. Furthermore, according to The Economist, countries with container ports rose from about 1% to nearly 90% which coincided with the rapid increase in global trade – see graph. Although it could be said that other events were happening at the same time – the movement towards free trade and reduced tariffs, the single market in Europe in 1992 and the eventually formation of the World Trade Organisation (WTO). Video below is from the FT.

WTO worried about protectionist measures

Having finished the trade topic in the AS course I was interested to read that although global trade is on the increase the World Trade Organisation (WTO) are still concerned about the level of protectionism that countries seem to implementing. When the Global Finaincial Crisis (GFC) started to impact on global growth the G20 countries, which account for 85% of global GDP, were determined not to replicate the protectionist measures of the 1930’s when the world economy went through a depressionary phase. China and India are steaming along and China accounts for 20% of India’s trade deficit – in the last year India has a trade deficit with China of US$40bn. According to the Economist for US$1 worth of exports to China, India imports US$3. What is also significant about world trade is that later this Russia joins the WTO and it is assumed that foreign direct investment in Russia will increase significantly. HSBC have suggested that the value of global trade will increase by 90% over the next 15 years.

However the WTO are not so sure of the growth in global trade. They believe that protectionist measures are a real threat to the free movement of goods and services. The barriers include higher tariffs and import and custom controls but more significant is the less obvious barrier which is excessive regulation/red tape. The graph below shows that China is the country targeted by the most governments for protectionist measures. Fifty-five countries have passed measures that hurt Chinese exports. That is followed by the U.S., with 49 measures against it; and Japan, with 46. Source WSJ.

USA v China – it’s a tyre issue

In 2009 President Obama imposed import duties of up to 35% on Chinese-made tyres. The Chinese didn’t like this and saw it as protectionist and estimated that it would cost its tyre industry US$1bn, and cause 100,000 Chinese redundancies. The World Trade Organization (WTO) has ruled that the US was entitled to impose extra duties on Chinese tyre imports as they had tripled in volume over four years. They also stated that this reduced US tyre production by more than a quarter over the same period, leading to 14% of workers in the industry losing their jobs.