Statistics New Zealand released yesterday the annual data on New Zealand’s overall foreign trade (goods and services) by country. It is a nice summary set of tables for people who don’t spend lots of time looking at trade data, and the services data are only available annually.
Since the end of last year, these have also been the data the Reserve Bank now uses to calculate the weights in its trade-weighted index measure of the exchange rate. Those weights are calculated on a total trade basis (imports and exports, goods and services) for 17 currencies, covering countries that currently account for a bit over 80 per cent of New Zealand’s foreign trade. The weights are updated annually, and when they are updated in December there will be a few changes. After much noise about China becoming our largest trading partner (which it has not yet been on a total trade, or even total exports, basis), China’s share in New Zealand’s foreign trade dropped back quite a bit over the last year. By contrast, the United States’ share rose. Whereas this year, the weight on the Australian dollar was only 2 percentage points more than that on the Chinese yuan, both well ahead of the US dollar, next year the weight on the yuan will be around halfway between those on the Australian and US dollars.
There is no easy right answer as to how to weight an exchange rate index. My own sense is that the current weighting structures overstates the importance of Australia, and understates the importance of the United States and the euro area (or the EU more broadly). These latter two economies/regions are a huge share of total world production/consumption, and are major competitors in our largest (net) export products, particularly dairy. Neither element is captured in the current weighting scheme. And while Australia is our largest export market, those numbers are flattered by the fact that still more than 12 per cent of our exports to Australia are crude oil and precious metals (presumably mostly newly-mined gold), which have nothing to do with wider economic conditions in Australia, or movements in the Australian dollar.
It is interesting how much of our trade with Australia is now dominated by travel. Excluding oil and precious metals, 28 per cent of our exports to Australia are travel and transport. No other single category exceeded 7 per cent of our exports to Australia last year. The picture is similar on the import side, where travel and transportation account for 27 per cent of our Australian imports.
And, finally, I was interested in the dairy export data. The media has been full of discussions around dairy exports to China, which had surged in 2013/14.
Here are our milk powder, butter and cheese exports for the last five years to China on the one hand, and the ASEAN countries on the other.
It highlights both how unusual last year was, but also how important those other countries are in New Zealand’s dairy trade. In a typical year, New Zealand firms export as much milk powder, butter and cheese to these countries as to China, and yet these countries in total have annual GDP not much more than 20 per cent of China’s. Actually, the data also illustrate just how diversified dairy exports are in a typical year.
By contrast, in the 1950s almost all our dairy exports went to the United Kingdom, and there were few other export markets anywhere for dairy products.
None of this is to suggest that China is unimportant. China is now the world’s second largest economy, with a very large foreign trade for a country of its size. And is a badly-managed, highly non-transparent, economy, at the tail end of one of the bigger, least-disciplined, credit booms in history. What happens in China matters a great deal to most countries, but there is no reason to think it matters abnormally more to New Zealand.
(As one perspective on the lack of transparency – and, worse, outright misrepresentation – that plagues the rest of world making sense of China, I’d recommend the latest from Christopher Balding, who takes on those who want to defend China’s data as providing a broadly accurate and representative picture of what has been going on).