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.