For several years, Donald Trump has made much of the bilateral trade deficits between the US and Mexico, and between the US and China. That rhetoric was to the fore again last week when Trump announced the imposition of steel tariffs. This was from one of Trump’s tweets on Friday
Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
I’m not aware of a single economist – with the possible exception of Trump adviser Peter Navarro – who regards this focus as meaningful or as sensible economic analysis. At an aggregate level, a country’s overall current account balance is a reflection of the savings and investment choices of its own residents. Thus, if for some reason one were concerned about a US current account (or trade) deficit, one thing that might make a difference could be a cut in the US fiscal deficit (lowering public dis-saving).
The mercantilist mentality, revived by Trump, sees trade deficits as, in some sense, a loss to the country, perhaps by analogy to the situation of a company running deficits (losses). But the parallel is simply wrong. Trade deficits are no more presumptively bad than trade surpluses are presumptively good. Both can be reflections of bad policies, or indeed of good policies. To the extent that the purpose of economic activity is to consume, trade deficits typically mean that of what your country produces not much is sold abroad, relative to what is purchased from abroad. If product isn’t sold abroad it is available for domestic consumption. And trade surpluses can be indicative of a deflationary impulse emanating from your country – you are selling stuff abroad (absorbing demand from other people), but not matching that with an equivalent demand for the stuff others have produced.
I don’t want to be read as taking these arguments too far. There have been plenty of trade imbalances (current account imbalances) that proved to be quite unsustainable, and the subsequent adjustment process was often quite messy and costly. In the very long-term, and roughly speaking, people consume what they earn. So sometimes, large aggregate imbalances can be a prompt to review policies. Large surpluses in a fixed exchange rate country, for example, might finally trigger an upward exchange rate adjustment (as in China a decade ago).
But the argument is even more than usually flawed when focused on individual bilateral surpluses/deficits, which have almost no economic meaning. That, in turn, is so for a variety of reasons. At a statistical level, in an age of global value chains, any finished product (especially manufactured products) is likely to have been added in a number of countries, but the country where the finished product is exported from will record all the value in its gross exports. An Airbus aircraft, for example, might have its final assembly in France. If the plane is sold to, say, a Turkish airline, the full value of the plane will be included in the Turkey-France trade balance, even though much of the value might have been added by firms in, say, Germany or the UK.
And at an economic level, since money is fungible – and we aren’t in a world of 1930s bilateral clearing agreements – why should anyone in the United States care whether there is a trade deficit with Canada and a surplus with France, or vice versa? What is earned in one place can be spent in another. Almost all of us, as individuals, have a goods deficit with the local supermarket, offset by the primary income surplus derived from selling our labour to some other firm.
At a country level, a country exporting mostly, say, diamonds might have a huge trade surplus with Belgium and Israel (places with specialist diamond-cutting industries), and large deficits with most other countries (spreading consumption more broadly). What of it? New Zealand won’t export many dairy products to, say, Ireland or Denmark, but might to desert places with not much of a dairy industry. And what of it?
None of this is to suggest that there aren’t bad policies, or policies which distort the trade numbers. But if the policies are bad – eg China’s restrictions on access to its markets for service sector firms, or lack of market disciplines on firms in some sectors with major overcapacity, large US fiscal deficits when the economy is back near full-employment, or New Zealand policies which, in effect, subsidise export education by bundling immigration access with the commercial product – they are bad on their own terms, regardless of any impact on particular bilateral trade balances.
But this isn’t a post about Trump and his take on economics. It was prompted by a rather similar outbreak of Trumpian economics from someone local who really should know a lot better. I wrote last week about the speech from Stephen Jacobi, the Executive Director, of the New Zealand China Council attempting to push back against concerns raised in various quarters about the influence activities in New Zealand of the People’s Republic of China and the Chinese Communist Party. Jacobi doesn’t have any specialist background on China – he’s a paid advocate – but he does apparently have a strong background in trade issues, from his time at MFAT, and subsequently as a lobbyist for trade liberalisation.
But his latest statement, released on Friday, left me thinking he must have put any economics to one side. We were told that
China trade surplus shows relationship working in our favour
It does no such thing. Bilateral trade surpluses aren’t “a good thing” (or a “bad thing”) and bilateral trade deficits aren’t “a bad thing” (or “a good thing”). They just are.
Here is a chart showing the bilateral goods and services trade surpluses/deficits for the top 25 “trading partners”, taken straight from an SNZ table.
It is a mildly interesting chart, but I’m not sure it tells us much about anything, and certainly not about trade or economic policy. Should we think better of Algeria and Sri Lanka (which presumably have a taste for milk powder) than of Switzerland and Thailand? I can’t think why we should. And I suspect that if the bilateral balance with China ever swung into deficit – and it does move around quite a bit with milk powder prices – Mr Jacobi would be the first to (rightly) push back against true local mercantilists suggesting that such a deficit was reason for concern.
It isn’t even as if the trade by New Zealand firms with Chinese firms is extraordinarily large. It is about the same size as our trade with Australia – a country with about 2 per cent of China’s population. Overall exports/imports as a share of GDP aren’t large at all for a country our size. And here is quick table New Zealand China-based economist Rodeny Jones put out last week
NZ has only middling trade exposure to China by regional standards:
% of exports to China/HK 2017
Mr Jacobi’s argument has the feel of rank opportunism. Perhaps that might be acceptable in a corporate lobbyist (although I doubt it in the longer run) but Jacobi’s salary as Executive Director of the New Zealand China Council is largely paid by the New Zealand taxpayers. We deserve better.
As it is, Mr Jacobi’s questionable economics is just the basis for another bid for New Zealand to maintain its subservient, deferential, attitude towards Beijing, and not get bothered about an expansionist hostile power seeking to exert influence in New Zealand politics.
“We need to see China as more than just a market. In New Zealand, China is looking for a long term, reliable partner which means working hard to build cooperation, trust and mutual respect even despite our obvious differences.
Indeed, the PRC is more than “a market”. It is the government of a repressive dictatorial state, unable to produce for its own people the sorts of living standards places like Taiwan and South Korea have achieved, with an active agenda – hardly masked – of projecting its powerful and fundamentally different values [Jacobi’s own term from his recent speech] into countries and regions around the world, defying international law, and attempting to cow any country that makes a stand for its own values and its own self-respect. It isn’t a regime worthy of trust, or respect. Perhaps there are some trade opportunities for individuals, but it should be a clear case of “seller (or buyer – but the sellers tend to have more concentrated interests) beware”, in which it is more recognised that every time you defer to the regime, you advance an evil cause.
A bit like our politicians really. Just occasionally, there is reason to think that perhaps our Minister of Foreign Affairs might take a different view. There were the very delicately-phrased words in his speech the other day about Chinese activity in the Pacific. There was the response, in after-speech questions, about the memorandum of understanding the previous government signed with the PRC on the Belt and Road Initiative (“I do regret the speed with which the previous government signed up”).
But what does it amount to? Here is Winston Peters on Q&A yesterday, from the transcript
CORIN You know full well that the Chinese will be watching every word you’re saying right now. Are you worried that there could be—? They don’t like public declarations about the South China Sea from New Zealand. I know that. Are you concerned?
WINSTON No one has been more respectful of the place of modern China in the world than New Zealand First and Winston Peters.
CORIN So do think there is too much? Because, I mean, we’ve got Anne-Marie Brady’s report. We’ve got Rodney Jones, Michael Reddell, others raising concerns and wanting a debate about Chinese influence in New Zealand – politics, but wider life. Do you think there is too much influence?
WINSTON Look, if you’re concerned about too much Aussie influence when it comes to banking you should say so upfront, and I have. If you think there’s been too much untoward American influence in this country in some ways then we should be upfront and say so, and I have. It doesn’t matter where it emanates from.
And thus our Foreign Minister, in his own inimitable style, but in much the same patterns as decades of his predecessors, trivialises the issue. Just like Mr Jacobi in that speech a week or so back,
Of course, the other side of politics is no better. Simon Bridges was also on Q&A. Here he is on the Belt and Road initiative, a mechanism for Chinese power projection in many countries, partly (but not exclusively) by loading pliant recipient countries up with debt they have little prospect of servicing.
[UPDATE: Just after completing this post I noticed this new report on the debt aspects of OBOR.]
CORIN Give me an example of what the Belt and Road means?
SIMON Well, it means economic opportunity, and what do I mean by that? Infrastructure. You’re seeing China invest significantly in infrastructure around the world–
Never mind the strategic foreign policy perspectives, but there might be some consultancy opportunities for New Zealand firms. It is reminiscent of Lenin’s line about the capitalists selling the rope they will, in time, be hung by.
I also heard Bridges on Morning Report this morning. It was straight out of the John Key playbook. We will “engage positively”, and might even (quietly) mention the rule of law, democracy etc, all while avoiding the issues that should matter rather more to other countries, including New Zealand – the expansionist efforts of the PRC beyond its own borders, and the influence activities in an increasing range of other countries, including our own. I haven’t yet heard Bridges grilled about his MP Jian Yang, but on what we’ve heard so far there seems no reason to believe that he has departed from the Key/English approach (largely shared by the Labour Party) – selling out our birthright, little by little, for the proverbial mess of potage. Keep the deals flowing for the selected business elites, keep the party donations flowing and never mind any self-respect, or frank discussion of the nature of the regime, and the nature of the threats it poses.
19 thoughts on “Bad economics from the China Council”
Given that we heavily subsidise our Agricultural exports to China which is mainly powdered milk, I am not entirely sure why there should be so much concern about us losing the China market or that China has too much influence on government policy making. It is rather difficult for our local businesses to take advantage of any Free Trade Agreements because our business leaders and marketers do not speak Chinese and english is not spoken widely in China.
Fonterra has clearly demonstrated that they can’t manage any investments in China taking massive losses on 2 totally dumb ventures even with all their corporate funding and muscle.
I spent 2 weeks in China setting up an Office in 2005. I had trouble finding even the closest toilet facilities due to language barriers. We subsequently ran the office for 2 years from NZ and then shut it down as too difficult.
Don’t forget export education and tourism, each delivered here
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Tourism …. check out the subliminal tourism mecca message in the background image on this immigration NZ page – hope its not 90 mile beach and not toheroas
When China first opened up allowing its first batch of students to study in NZ, that was when China actually controlled where its students could study. All these apartments in Auckland were initially built to cater for the influx of these chinese students. The apartment prices did drop like a stone when China opened up to the rest of the world and chinese students disappeared preferring the US, Canada and Australia. We have already lost our first and only provider status for Chinese students a long long time ago.
The current export student trading environment allows Chinese students to choose freely the country to study. It would be rather awkward for the Chinese government to even attempt to single out NZ for disagreeing with the Chinese government and initiate a ban. Don’t forget that China is a member of the WTO and fought hard to gain membership. That WTO membership was not handed over. It took a lot of NZ initiation and support to get China eventual membership. It is highly unlikely that they would risk membership of the WTO. They do want open trade at least publicly and that is how the Silk Road is being sold publicly. It is the same with the tourism industry. Can’t just block/ban NZ off the list of acceptable countries to visit other than some governmental disagreement. China is not that silly to take a Donald Trump approach.
Fletcher Building and Construction went in to China and Hong Kong in the latter stages of the last century. It finally beat them and they got out at some cost in the early 2000’s. Reading between the lines at the time, it was the added unspecified under-the-table payments killed it off and there was no profit and was never going to be any profit
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“” Keep the deals flowing for the selected business elites, keep the party donations flowing and never mind any self-respect, or frank discussion of the nature of the regime, and the nature of the threats it poses.””
Strong summary but a fair call.
Mr Jacobi is right about “”China is looking for a long term, reliable partner “”. That makes sense and there is no reason NZ can’t be that long term and reliable trading partner but the partnership is asymmetrical.
If Jacinda wakes up one morning and spits the dummy and tries to do her best to destroy the Chinese government then very little will actually happen; if she were sufficiently over the top probably we would have a change of Prime Minister but with its control of the media the Chinese people will probably never notice.
Whereas if President Xi wakes up feeling anti-NZ we are in trouble. So we should never rely on China until it has a free media and democracy. Which is no reason not to take all the opportunities to import and export on a day by day basis while avoiding entanglement.
NZ has long been considered a friend. The work done by New Zealanders such as Rewi Alley in the 1930s until today is recalled and talked about by Chinese leaders.
In 1997 New Zealand became the first Western country to conclude a bilateral agreement on China’s accession to the World Trade Organization (WTO), NZ subsequently gave recognition of China as a market
economy, the first developed country to enter into negotiations for an FTA and the first to sign a high-quality, comprehensive and balanced FTA with China.
Chinese leaders have taken to endorsing the China/NZ relationship in very glowing and positive terms. John Key as Prime Minister was given a red carpet welcome when he visited China when Barrack Obama was snubbed and even the Australia prime minister at the time was not given the same red carpet welcome. It is very unlikely China would forget easily these deeds. They actually document and give remembrance to good deeds on behalf of China.
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“Chinese leaders have taken to endorsing the China/NZ relationship in very glowing and positive terms.”
Yes, they have likened it to the China-Albania relationship.
The little by little process – NZ and Ardern are being gamed
Check the growing influence of China in the Pacific and the wedge it is creating, making New Zealand look foolish.
Makes one think of the sayings
Don’t take a knife to a gunfight
Don’t take petty-cash to a high-stakes poker game
Don’t bring high heels to a 100m sprint
Read the Newsroom article below by Sam Sachdeva covering Jacinda Ardern’s trip to Samoa to dole out $9 million in Cyclone Gita aid while China is ladelling out $2 billion in grants and $2 billion in soft loans over the Pacific. The Samoan PM dismisses NZ’s concerns. In the next breath Samoan PM thanks NZ for the RSE seasonal workers intake and, without blinking, blatantly asks Ardern to open the Pacific Quota intake scheme to include Samoa. The Pacific Quota scheme is Pacific Access Category Resident Visa allowing for
75 Kiribati citizens
75 Tuvaluan citizens
250 Tongan citizens
250 Fijian citizens
On Monday nights news on TV1 has the Samoan PM blithely demands Ardern include Samoan’s into the Pacific Quota
Population of Samoa 195,100 with 110,000 living in AU and NZ
NZ 2013 Census 70,100 claim Samoan ancestry
Australian Census 2006 39,992 claim Samoan ancestry
Australian Census 2016 75,000 claim Samoan ancestry
Samoan population resident in China = nil
Newsroom article by Sam Sachdeva
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Samoa’s Prime Minister believes that if people stopped looking at Chinese as people buying into Samoa and more at the positive and collective benefits to the economy, then it would be clear that they are only in the country to help.
Samoa’s Prime Minister says anti-Chinese sentiment is racist
That’s nihilistic. What price place and identity?
Samoan population currently resident in Samoa = 195,000
Expat Samoan population 145,000 currently resident in AU+NZ
On the diplomacy scale, the Samoan PM is happy as a sandboy with China, and unhappy with NZ because we won’t take more of his people and has the chutzpah to say so directly to our PM’s face
I can understand Kiribati, a sinking island would certainly need the Island terra forming technology that China has. Afterall, China has built military islands where none existed in the South China Sea and also they have a $100 billion project off the coast of Malaysia/Singapore building 4 islands which they are creating apartment dwelling and living spaces in the middle of an ocean.
A friend who had motels in Queenstown told me Chinese own 90% of the motels in Christchurch. They are also buying up in the heartland eg the Omarama Merino Cafe and motels in Fox etc. Around Wanaka, Queenstown and Cromwell you see suburban sprawl and what it suggests most is that this is the reason for our lax immigration policies. It is ugly and chilling. I’m reminded of Ranginui Walkers: “I resent all these people coming here. If this continues New Zealand will be ruined ; it will be just like anywhere else”. Meanwhile the Press has had articles about the new state housing. The density is not nice and it is a step back from those little state houses around Riccarton built for workers at the Railway work shops. My friend is looking for a house in Christchurch at the moment, he gets depressed as every open home he goes to car loads of Chinese show up. The government would like us to think these are *highly skilled*. In fact what we see is Chinese driving tour buses full of Chinese.
I remember reading a few years ago about a Chinese mathematician (name forgotten) who has more techniques for factoring numbers than anyone in the world. If she wants to live in NZ I would roll out the red carpet myself. If NZ was swamped by truly skilled immigrants I’d be happy where ever they come from.
Bus drivers and dubious chefs are not skilled and frequently earn below the NZ average wage. And an area of my own experience the majority of people labelled as IT professionals are nothing special; those who are special are well worth having in NZ but there is no test that distinguishes the dumb average and the high performers other than the salary a competent company is willing to offer. Admittedly from a small sample the best two programmers I’ve met in NZ are a self-taught Kiwi and an Indian immigrant from Kerala.
Skilled immigration is a great idea – we really ought to try it.
Unfortunately the hundreds of thousands of available jobs are available as cleaners, bus drivers, Uber drivers, prostitutes, Chefs/Cooks in the service sector.
There may be 2 jobs available for a mathematician in Gisborne in our new space launch facility now owned by a US company because funding in NZ for an NZ designed and built rocket is just not available or maybe the University of Auckland has 2 jobs available there because Immigration rejected the application of 2 renowned mathematics professors now disgusted with NZ attitude due to having in their family, a spastic child a year ago.
So where do you think a mathematics genius or a skilled migrant is going to find work?
Our focus must be on creating the industries and the jobs first which we simply are not doing very well. All the billions of dollars of subsidies are going into primary industries which only need the skill set of attaching a milk machine to a cow, Tourism and International students.
If you are interested in Productivity check out the following article in Newsroom
It’s a story about an outfit from Hong Kong who first appeared on our shores in 2016 and obtained OIO approval to purchase 3551 hectares of land on the shores of Lake Pukaki which is a little further west of Lake Tekapo. Two of the most famous gems on the NZ landscape. Nothing has happened yet but you need to check out how the foreign owned company Blue Lakes NZ Ltd has tied up our courts and “Government” and government departments and Land court and Environment Court and local councils and the MacKenzie Country in total knots. Now they want to build on adjacent land that is crown land that they don’t own and is leased in perpetuity to Meridian Power
Drip, Drip, Drip, little by little
Yes we should have this Foreign Buyer Ban retrospective to say 2010. Then we can force James Cameron of blue aliens, Avatar fame to sell off his
1. 21 hectares of land along Western Lake Rd.
2. 817 hectares Pounui Lake property
3. 250 hectares Wairarapa dairy farm.
4. 10 hectares lifestyle block in South Wairarapa
5. 13 hectare lifestyle block in South Wairarapa
6. 30 hectares South Wairarapa
7. 420 hectares of land in Western Lake Rd, south of Featherston.
8. Walnut Orchard in Cathartan
Drip, Drip, Drip, little by little