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Free trade suckers

Written By: - Date published: 10:45 am, August 30th, 2011 - 38 comments
Categories: debt / deficit, exports - Tags: ,

The effects of our economic belief system on our balance of payments

The global economy relies on a set of rules to ensure fair and free trade.  The “Free Trade” nations rely on the “level playing field” that is they rely on all partners acting honestly and openly and according to the same set of rules.  This however is not the practice.  Only some countries abide by the rules.  The effect of the cheats versus the honest players is the same as in cards.  Cheats prosper.  One of the basic concepts of free trades is the floating exchange rate.  The floating exchange rate should in theory result in each country’s exchange rate moving to a point where its imports and exports balance because the value of its currency will move up when it’s export flows improve and down when its imports become excessive.

The result is that a country with a strong exchange rate will import more and a weak one will produce more internally.  The fundamental flaw in the world of trade is that not all parties do this.  If any one country can artificially fix its’ currency at an artificially low level then it will have a trading advantage that is equivalent to a tariff on imports and a subsidy on exports.  Conversely with a country like New Zealand where we have a severely over valued currency we are effectively subsidising imports and placing a tariff on exports.  Our indebtedness is a clear testimony to that.

The Central Intelligence Agency publishes an annual set of Country Reports and in 2008 its summary of nation’s current account balance had the greatest surpluses in the hands of the countries that are oil rich and have nationalised their oil resources, Saudi Arabia, Russia Norway and Kuwait, or that have currency controls and are centrally planned economies China, Japan Singapore and arguably Switzerland.

The beneficiary nations of the European Union also rank up there as the EU set permanent currency distortions with undervalued currencies for the northern European countries and over valued for the southern nations.

Rank
Country
Current account balance
1
Protectionist/undervalued
$ 363,300,000,000
2
Protectionist/undervalued
$ 195,900,000,000
3
Protectionist/undervalued
$ 185,100,000,000
4
Oil/Nationalised
$ 88,890,000,000
5
Oil/Nationalised
$ 74,000,000,000
6
Protectionist/undervalued
$ 67,890,000,000
7
Protectionist/undervalued
$ 59,280,000,000
8
Protectionist/undervalued
$ 55,820,000,000
9
Oil/Nationalised
$ 51,490,000,000
10
Central planned
$ 41,390,000,000

At the bottom of the list we have the global trade basket cases.  What is interesting to note is that most of the worst cases are governed by free market ideologies.  India has the same cheap labour pool advantages as China.  Australia has an equivalent natural resource wealth as Saudi Arabia.

New Zealand is on a per capita basis one of the most well endowed countries on the planet.  But we are at the losing end of the global trade war.  Our indebtedness means that we are becoming ever poorer as the cheats at the game of global free trade take our money from us and use it to buy our assets.  This makes us poorer again.  Our indebtedness is a black hole and our fatal path into its’ depths is inexorable – under the current ideology.

150
Resource rich free market
$ -9,973,000,000
151
Free market/overvalued
$ -12,600,000,000
152
Free market/overvalued
$ -18,130,000,000
153
$ -18,530,000,000
154
$ -18,530,000,000
155
Resource rich free market
$ -20,060,000,000
156
$ -22,600,000,000
157
Free market/overvalued
$ -35,940,000,000
158
Free market/overvalued
$ -36,270,000,000
159
Free market/overvalued
$ -36,400,000,000
160
Resource rich free market
$ -50,960,000,000
161
Free market/overvalued
$ -57,940,000,000
162
Free market/overvalued
$ -111,000,000,000
163
Free market/overvalued
$ -126,300,000,000
164
Resource rich free market
$ -747,100,000,000

Our free market ideology endows us with a victim mentality.   We can’t remove ourselves from the abuse and we applaud our abusers.

China, the worst offender doesn’t just cheat on the floating currency, it cheats on copyright, it cheats on employment and environment law and it subsidises energy. It also uses a wide range of non-tariff barriers to trade to protect its own domestic economy.  It also trades in our domestic market without having to meet all the costs of production that the domestic producer must face.  The more of our domestic production that imports displace, the fewer domestic producers remain to cover the social overhead of our domestic economy with the result that the domestic producer is either crushed by the overheads or shifts production to a place where these overheads don’t exist.

China has seen the flaws in our ideology and is exploiting them.  China will end up owning us using our own money to buy us.  This is as inevitable as gravity.  The global trade imbalance is structural and it will persist and grow for as long as we its victims allow it to.  As resource owners we have the power, as the oil owning states that have nationalised their resources have already learned.   If we want to get out of this situation we need to learn from our abusers and stop listening to our fellow abused who can be identified on the CIA list along side us.  Several of these have already fallen into the economic black hole.  We are only being prevented from joining them because we are resource exporters and we have major capital inflows as our resources are removed from our ownership.  This is a temporary respite.

We can escape from this situation but it will take a very different approach to trade and commerce and to finance to achieve it.

38 comments on “Free trade suckers ”

  1. Policy Parrot 1

    Trade barriers are exactly that. Barriers to trade. So, in effect they are bad. But what is worse is the approach that the New Zealand Government took to trade in the 80s and 90s, by unilaterally removing trade barriers while our competitors kept theirs up.

    I know there’s always one sucker who so keen to jump that despite the chance of others wimping out they’ll go as soon as they can. Unfortunately, for us, it was us.

    Not opposed to the Government negotiating to remove trade barriers. But there has to be some serious bargaining on CBA grounds before any deal goes ahead – not just stoopid voo-doo fervour.

    EDIT: In addition, there should be certain minimum standards/wages/practices guaranteed by the industry’s seeking trade access to New Zealand/and vice-versa. Of course it is unfair for companies to compete solely on the basis on their home government’s willingness to allievate the worst working practices.

    • ropata 1.1

      we should take a leaf out of Australia’s unwritten trade strategy,
      – block and hinder imports as much as possible (see: NZ apples and fireblight fearmongering)
      – sabotage foreign owners operating in Aussie, or just make life difficult (see: AirNZ attempt to take over Ansett – followed by industrial action, diplomatic incidents, and mysterious deletion of aircraft maintenance records, effectively grounding the whole fleet)
      – tilt the market in favour of local production as much as possible without technically breaking trade rules
      – award big contracts to local industry (we seem to do the opposite)
      – be more bolshie with the government and use industrial action (eg. tractors in parliament grounds, trucks stopping on the motorway) to force them to listen to local concerns over their corporate pals
      – don’t leap into free trade agreements signing away our sovereignty without 75% majority approval

      • prism 1.1.1

        @ropata – Good thinking. The unfortunate case of the entrepreneur airline from Hamilton having his major plane grounded in Queensland just before a fully-booked Easter because of cracks found by a ‘chance’ inspection, which I understand were not affecting safety or the good running of the plane.

  2. Jim Nald 2

    We are not very good at playing this ‘free trade’ game, aye?

    How come we tend to end up getting the worse deals in most things?

    The Kiwi isn’t that smart? The Kiwi is susceptible to many ‘free trade’ predators out there? The Kiwi on the way to extinction? The Kiwi survives only in the ‘free trade’ captivity called a ‘free trade’ sanctuary?

    Bloody yo-yo currency. Benefits who? Currency traders bwahaha.

    Nice to eat or nice to have souffle-like Kiwi dollar?

    Peg the damn thing to a basket of currencies.

    The question is: what currencies should strategically make up that basket?

  3. ropata 3

    You forgot attribution to darkhorse.

    Brilliant post BTW. Should be front page news.

  4. clandestino 4

    It wouldn’t matter how well we negotiated FTAs. We will always and forever lose out on labour costs. Not because we haven’t negotiated minimum standards, but because the supply-demand balance in poorer, populous countries will ensure low wages, despite all the well-meaning minimums.

    So long as the cost of energy inputs is below the difference in labour costs, most shit will keep getting made in China.

    Time we started targeted protection of manufactures in advance of higher energy costs and its economic and social consequences.

  5. Colonial Viper 5

    Hey where are all the RWNJ’s trumpeting the benefits of Neoliberal Free Trade? Come back come back!

    Of course, the reason that NZ is doing so badly on that table right now is that we are not “free” enough! Open us up further and take away our protections, that is the answer. If we only spread our legs wider we will finally receive the benefits we are due!

    • Jim Nald 5.1

      Neolib’s free trade?

      That’s when they extort a large fee
      and then pee on you

      Are you feeling that trickle down effect?

    • Gosman 5.2

      Ummmm…. what do you want someone on the right to comment on a supposed benefit of having Current Account surpluses do you?

      Have you read Adam Smith’s ‘On the wealth of nations’?

      You do realise that trumpeting surpluses such as these is essentially the same argument that went on in the 18th Century between Free Traders such as Smith and Mercantilists represented by ‘academics’ at the French court don’t you?

  6. Thomas 6

    This article misses the point (and basic economics). The problem is simple: we are borrowing too much and saving too little. The current account deficit is exactly that: It shows how much our country is borrowing (or selling investments) overseas.

    Our dollar is high because to buy NZ debt you have to buy NZ dollars. So our borrowing is driving up demand for our dollar.

    Blaming free trade is not the solution, nor is currency intervention. We need to address the fundamental issue.

    I’m not sure I agree with the classification of countries like Germany and Japan as protectionist, Singapore as centrally planned, and France as free market.

    Import tariffs are not the answer. They will increase the cost of living and slow our economy, without having a significant impact on borrowing.

    Also, you can’t just set the currency price without consequences. Undervaluing your currency leads to more people buying it, which means you have to print money to meet demand, which drives up inflation. China is an example of this with 6.5% inflation (and they are slowly increasing the value of the yuan). Overvaluing your currency leads to a run. This continues until the central bank’s foreign currency reserves are exhausted. Money traders make a healthy profit from currency crises. When the pound sterling was devalued in 1992, it cost the UK 3.3 billion pounds and much of that went to George Soros. This is why it has been accepted that a floating exchange rate is best.

    • Jim Nald 6.1

      Exactly. We have accepted the best option. This is best system we have to live with. Nothing to see here. Stupid Standardistas.

    • Colonial Viper 6.2

      This article misses the point (and basic economics). The problem is simple: we are borrowing too much and saving too little. The current account deficit is exactly that: It shows how much our country is borrowing (or selling investments) overseas.

      All you’ve done here is describe the SYMPTOMS of the free market neoliberal DISEASE.

      And you’ll notice that the countries in the table who don’t buy into your Chicago school crap don’t have the disease, and therefore don’t have the symptoms of a structurally fucked current account deficit.

      I’m not sure I agree with the classification of countries like Germany and Japan as protectionist, Singapore as centrally planned, and France as free market.

      He gives a fuck what you agree with, you’re a Chicago school neoliberal, and according to the table above, the countries who run the biggest trade surpluses (and who are net creditors to the world) have long learnt to ignore your ilk.

      • Thomas 6.2.1

        according to the table above, the countries who run the biggest trade surpluses (and who are net creditors to the world) have long learnt to ignore your ilk.

        CV, the ones at the top of the table are resource-rich, that is why they have current account surpluses. Furthermore, you suggest that free market policies lead to current account deficits. This assertion is challenged by China (which has been liberalising since 1978), Germany (liberal since 1948), and Singapore (considered the second most liberal economy in the world) being close to the top.

        I think that there is an alternative explanation. Take Norway and Nigeria as examples. Both countries are oil rich and the rest of their economies are a shambles. The problem is that oil is so profitable that other economic activities are no longer attractive. Norway saw higher education rates drop off when oil was discovered, as it was no longer worthwhile getting a highly-skilled job. Nigeria cannot feed itself; it has to import food because farming and fishing are no longer attractive.

        So here is what the table tells me:
        (i) Resource-rich countries have current account surpluses.
        (ii) Resource-rich countries can cover up dysfunctional economies.
        (iii) Fiscally irresponsible countries have current account deficits.

        • In Vino Veritas 6.2.1.1

          Nice work Thomas. I’m liking (iii). I note that the table says NZ is resource rich. This may well be so, but we arent allowed to get at those resources. Unfortunately clean and green doesnt lend itself to extracting resources in a cost effective way.

          And just remember all, tourism doesnt count as a resource….

        • clandestino 6.2.1.2

          Germany is neither resource rich nor liberalised. They are a net importer of energy.

          Germany benefited from the creation of the ECSC and the agreement with France to subsidise their agriculture if the rest of the EEC subsidised German manufacturing. Germany imported millions of cheap labourers from Turkey to compete on wages during the latter decades of the 20thC, effectively a NTB. This was extended when East Germany joined in. And we all seem to forget the Marshall Plan.

          You are a fool if you think Singapore is not a centrally planned economy down to the dot. Their planning involves almost every sector of life from an individuals educational path to where you live and how you eat. Not to mention strategically as a major port facility and financial hub.

          As for the rest, balderdash. Nigeria is still poor because the oil companies saw fit to extort concessions (royalties etc) from the people of the country by paying off the government which is corrupt as all hell.

          Norway has been fortunate, but has invested and behaved wisely especially re: EU engagement. The main reason it can’t compete in other industries is their GDP/capita is already 55k, do you think they want to take a pay cut so they can make shit?

          It is you who fails to see the bigger picture.

          • clandestino 6.2.1.2.1

            Oh and by the way seeing as we are talking basic economics, you do realise industry subsidies (tax incentives, corporate welfare, ‘R and D’ cash) are ALL non-tariff barriers and therefore PROTECTIONIST. Why we go on denying this reality and don’t do it ourselves because we think it’s ‘right’ is beyond me.

            Oh it’s coz we’ve got a bunch of blind ideologues running things, I forgot.

          • rosy 6.2.1.2.2

            As Angela Merkel said to Tony Blair…

            Merkel was once asked by then British Prime Minister Tony Blair what the secret was of her country’s economic success, which includes being the world’s largest exporter and running substantial trade surpluses in recent years. She famously replied, ‘Mr Blair, we still make things’. In Germany, manufacturing still dominates finance because Deutschland capitalism didn’t succumb to the financialisation of the economy that swept the United States and Britain in the 1980s under Reagan and Thatcher.

            An interesting little read, this article – how a conservative leader has policies that any left wing government should espouse.

        • Draco T Bastard 6.2.1.3

          the ones at the top of the table are resource-rich,

          Ah, that would explain why China needs to import so much raw resources such as oil and logs (from us in fact)…

          Oh, wait…

        • Colonial Viper 6.2.1.4

          This assertion is challenged by China (which has been liberalising since 1978), Germany (liberal since 1948), and Singapore (considered the second most liberal economy in the world) being close to the top.

          Fuck off

          As a foreigner you cannot buy any power infrastructure in China, and if you want access to key markets you MUST partner with a Chinese company and GIVE them your tech. That’s liberalised? No, this is China using the parts of the free market rule book which SUITS THEM. They ignore all the rest of your bullshit.

          Germany liberal since 1948 you must think we are fucking idiots, Germany has the strongest trade unions in Europe and their business community loves private family owned businesses not foreign multinationals, and by the way anyone who wants to outsource manufacturing work from a German factory must give the workers A YEARS NOTICE.

          As for Singapore. Lee Kuan Yew ran Singapore with an iron fist, both political and business enemies were destroyed, a completely centrally planned economy with the government picking winners and giving them billions. (Check out the recent investments in biotech). Also the Singapore Govt BUYS private sector assets and runs them, it doesnt sell.

          You are a loser who knows nothing even about the economic theories you pretend to espouse.

    • mik e 6.3

      Germany and Japan Not Protectionist you’ve got to be joking German farmers get more subsidies than our farmers make in profit like wise Japan.The Reason we are in so much debt is we are allowing our dollar to inflate against printed and pegged currencies keeping their economies going while ours borrows and hopes.So we are to small to say boo and our politicians would rather borrow than print or peg we are the suckers.Helping their economies the Soros’s who have been telegraphed well in advance that we a going to play the game by the rules while everybody else that counts doesn’t.Savings would help But this Govt Seems hell bent on undermining a decent compulsory saving scheme as it has done every other time in the past look across the ditch .2020 Australia will have $2trillion in the bank NewZealand at best $60 billion.Savings per capita Australia will have 10 times more so much for catching up with Australia!

    • KJT 6.4

      And the money traders have not been making a huge profit from our dollar since it was floated??

      The worlds most traded currency. Because of our stupid and shortsighted reserve bank act.

      If you think Japan is not protectionist, try selling non Japanese manufactured goods in Japan.

      Singapore is almost totally centrally planned. The Government has fingers in almost everything. That is how they manage to maintain a military and subsidise industry with such low tax rates.
      Unlike our dipshits, who think we should leave it to the magic of the market.

      China has 6% inflation. We have over 20% inflation in necessities without corresponding wage rises.

      Being the first, first world economy to lie down and spread our legs for the IMF, has and will cost us dearly..

      Our heavily subsidised and protected farming has been the only real earner as the rest of the economy has been gutted, in the totally mad idea, that the USA and EU will remove agricultural protection, if we expose our manufacturing.

    • prism 6.5

      @Thomas Which textbook are you quoting from?

    • mik e 6.6

      Chinas inflation is around an housing bubble not currency valuation . they have increased interest to cope with that they also have a centrally planned economy if run right they can mitigate more factors in their economy than free market economies thats why their are no free market economies with saving more than debt.

  7. Afewknowthetruth 7

    Fortunately the whole system is at the point of imploding, so we won’t have to worry about free trade for much longer.

    The decline in energy availability associated with the peak of oil extraction will demolish most current arrnagements by 2015.

    Neoliberal twats won’t know what hit them.

  8. Policy Parrot 8

    Interesting with regard to the list, it was only 13 years ago that Russia defaulted on her Paris Club debts (debts inherited as the legal successor of the Soviet Union), and now they have a huge sovereign fund to which to do battle with (of course with the assistance of a prejudiced trial of an oligarch – they were/are all guilty – just Khodorkovsky got uppity).

    Has the war in Iraq done the opposite to the US strategic position than was intended? Rather than a Pax Americana, has it in fact moved the global strategic scenario to that of a multipolar world? Because, if in fact, the situation remains a [largely] rules-based order, then Europe and the US will be increasingly [financially] beholden to countries that [currently] are in strategic opposition.

  9. hellonearthis 9

    Those figure look bad, but NZ looks worse when you look at the per head figures.
    The USA comes in at -$2433.49 per person
    And New Zealand at -$2260.76 per person

    On the balance there, we seem to be pretty close to the USA position.

    • KJT 9.1

      Yeah. We are going to catch up to the successful countries by following the UK, Ireland, Greece and USA’s example

    • mik e 9.2

      And the per capita income of a citizen in the U s is not quite double ours . So we are in deeper doo doos Most non bank economists are picking another downturn before or around 2015 . Borrowing bill will have us owing about $75 billion by then

  10. Draco T Bastard 10

    Now if the FTAs hust dealt just with free trade (the exchange of completed products) and not free capital movement and ownership we’d probably be able to get ourselves back out of debt. No nation needs to borrow money from any other nation.

  11. MrSmith 11

    Great post: 
    So crime does pay and honestly isn’t always the best policy, the sooner we put the walls back up the better, at-least start building them before we become renters in our own country.
     
    Trying to convert the world is honorable but will fail, this is just business and in business there can be no room for the romantic fantasy of fair free trade with another country, the only winners will be the middle takers and the crooks, I understand how people get sucked into the free trade ideology, but we are not dealing with mathematics here, there are people involved for Christ sake.

    • Afewknowthetruth 11.1

      MrSmith

      ‘we are not dealing with mathematics here’

      Opps. I’m afraid we ARE dealing with mathematics.

      http://www.albartlett.org/presentations/arithmetic_population_energy.html

      Indeed, mathematics is why the system is now imploding.

      ‘there are people involved for Christ sake’

      Unfortunately mathematics doesn’t care about people.

      And the elites who are in control definitely don’t care about people.

      People need to wake up to some fundamental truths. But most won’t.

      • MrSmith 11.1.1

        I think you understand what I was trying to say though AFKTT, People are doing the sums and people are unreliable at best. 

  12. Brendon O'Connor 12

    Oh god this is all so terrible, we need to start bailing out more corporates and quick.So many corporate buddies to wash with dosh and so little taxpayer base to do it with.

    Also, do you think for a minute that China can’t mine it’s own resources. It will when it has depleted the rest of the worlds. They are not as silly as we give the credit for.

    • Colonial Viper 12.1

      Also, do you think for a minute that China can’t mine it’s own resources. It will when it has depleted the rest of the worlds. They are not as silly as we give the credit for.

      +1

      Very interesting how China, with one of the largest coal reserves in the world, has recently become a net coal importer.

      They’re not selling their coal mines off for worthless USD, thats for sure.

  13. Well that stirred you all up – great dialogue!

    The fundamental problem is one of leadership and belief systems and ideology. Polarised opinions are the real problem as a number refer to Adam Smith and maybe more should read him. Capitalism can only work in a stable and equitable society socialism and capitalism are not mutually exclusive they are mutually dependent. The alternatives are feudalism or fascism.

    As for surviving int eh big wide world. The All Blacks have just been accused of being the best rugby cheats in the world. They learnt that from the Australians who used to be the best rugby cheats in the world. And no doubt will be once again – but hopefully not too soon.

    We live in a nasty world were the innocent get shafted.

    I am not advocating criminality or low ethics as each of these are economically and socially sub-optimal strategies however we need to abide by the rules of which ever game we play. There is no point in being naive that just costs us money. Australia is our closest ally but as pointed out by several commentators here shafts us at every turn. There was good reason for mother England exporting their forefathers – the greatest experiment in reverse eugenics ever.

    Anyone who thinks CER is good for us only needs to look at what the Aussie banks are doing to us to see what China will be doing to us next.

    New Zealand needs to be run as if it was a small business or a family. Don’t spend what you don’t earn, don’t borrow unless to invest it in something that earns more than the rate of interest. If you can’t afford to buy it you make it yourself. You don’t hire Mr Green to do your lawns if you have an idle teenager lying on the couch.

    We lack good management at the top, instead our governing representatives have become the petty crusaders for narrow and selfish interests fighting over the diminishing pile of crumbs from the cake that was once our inheritance.

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