- Date published:
8:45 am, June 3rd, 2019 - 49 comments
Categories: australian politics, business, capitalism, China, class war, debt / deficit, Donald Trump, Economy, Financial markets, Free Trade, housing, International, us politics - Tags:
New Zealand is currently avoiding the economic effects of a full
politically manufactured economic crisis originating in the Donald
Trump presidency of the United States of America, but not for long.
This emerging economic crisis is likely to decrease the capacity of
the New Zealand economy in the near future.
The United States has put tariffs up on Chinese goods in a range of
fields, and China has followed suit with slightly more restraint as it
has somewhat more to lose.
Here’s the history of these retaliatory trade strikes up to May 14th,
which also includes links to lists of all the affected product lines.
China’s tariffs on US$60 billion of U.S. goods came into effect as of June 1st.
China also has stronger retaliatory measures that it could call on.
One of these is the export and refining of rare earths. China
dominates world and U.S.-export trade in these materials. These are a
group of 17 chemically similar elements which are used for the
manufacture of high technology products.
They include elements critical to the manufacture of loudspeakers,
computer hard-drives, wind turbines, hybrid cars, camera and
telescope lenses, cinema lighting, catalytic converters, crude oil
refining, welding visors, x-ray and MRI scanning systems, televisions,
computer screens, nuclear reactors, and bunches of other stuff the
U.S. makes a shedload of money in manufacturing.
China has about 70% of the global share of all of that set of specific
materials and their refining.
China would have difficulty simply cutting off exports, since a
previous attempt to do so resulted in a World Trade Organisation case
But Apple is the obvious counter-strike target as a US-owned company
to avenge the targeting of Chinese-owned Huawei, and Apple
manufacturing would at least slow considerably with a major rare earth
trade move. Difficulty in getting Huawei Android upgrades is
important, slowing down the entire Apple manufacturing cycle is
China could also try to sell U.S. Treasury bonds, since it holds
masses of them. If they did that it would be very possible that
China’s remaining U.S. debt holdings would decrease in value very
fast. But in mid-May China sold off US$20 billion of US Treasury
bonds, and everyone knew who it was.
That’s a big chilly signal to send to the US-dominated debt market
traders. While they are not yet likely to turn US Treasury bonds into
a trade weapon, don’t rule it out if Trump keeps escalating this.
China could also make US businesses uncompetitive inside China by
doing a big go-slow on permitting in business activity which favours
domestic business over US. More inspections, slower port releases,
slower permitting of all kinds of categories of trade. In case we
don’t know how effective that is, New Zealand only needs to remember
what happened to Fonterra’s products when there was merely a scare to
its infant formula products. Despite our own officials swearing it had
nothing to do with government policy, it was really easy for other
commentators to make those direct links back to New Zealand’s own
initial Huawei decision.
But even for the Chinese government there will be limits to how much
economic pressure it can take. Nearly a year ago in July 2018, the
Chinese Communist Party’s Politburo analyzed the current economic
situation and proposed stabilizing employment, finance, foreign trade,
and investment to tackle external changes and ensure stable economic
operations effectively. Within that list, the Politburo ranked
“stabilizing employment” as the first and most important task. In
addition, the report of the 19th National Congress of the CCP also
stated that employment is pivotal to people’s well-being, noting that
instability in employment will affect the standard of living and may
ultimately affect social stability.
From this perspective, stabilizing employment is tantamount to
safeguarding social stability from economic risk. Lest anyone forget,
social stability is all the Chinese government has to keep it in
power, as they demonstrate from the efforts to in suppress the 30th
anniversary of the massacre of Tianenmen Square this month.
The harder these retaliatory movers hit, the more China will be
exposed because its economy is more brittle and it has only its
economic performance to sustain its governmental social mandate,
whereas Trump’s polls are so low he’s immune from public fallout and
his key economic indicators such as unemployment and national economic
growth are much stronger.
There’s also a state security issue coming straight to the fore as a
trade issue as well.
United States Secretary of State George Pompeo has issued a warning on
June 31st after meeting German Foreign Minister Heiko Maas, that
countries which allow China’s Huawei to build their 5-G networks could
be cut off from crucial intelligence data.
Earlier in May Pompeo had urged U.K. Prime Minister May not to use
Huawei technology to build heir 5G networks.
From both the actions of the U.S. and Chinese governments in trade,
this trade+intelligence security war is likely to escalate rather than
defuse, and (obviously) these two countries represent the largest and
second-largest economies in the world.
Little old Kiwiland is fully reliant on them both, as is our big
So what does all this mean for the global economy? Well, Goldman Sachs
has analyzed it:
Our model says that an across-the-board 25% tariff on China with a
limited amount of retaliation would hit US GDP by 0.5% and Chinese GDP
by 0.8%, all over a three-year period,” analysts at US investment bank
Goldman Sachs said in a research note.
This is the net effect from 1) direct trade effects, which are
positive for the US but negative for China, 2) the effects of higher
inflation on real incomes, which mainly hit the US and 3) the effects
of tighter financial conditions, which are also most negative in the
The unusual part of this global economic slowdown is how much of it is
the result of direct and predicted unilateral political actions by
China and the United States, rather than some massive market failure.
Both countries are still learning daily lessons in how resolute the
other is in this trade war – how much political capital they are
prepared to spend to make the other suffer and bend. So far the limits
are rising higher and higher.
Our Minister of Finance is confident that New Zealand is well placed
to handle a global economic downturn.
His comments follow the chilly IMF global economic stability forecast
released in April this year.
But decreasing economic growth, as even National sees, also means
proportionately decreased taxes, and this proportionately decreases
government capacity to spend on all that good social stuff, unless
there’s also really good headroom for spending by raising debt.
Robertson continues, smartly, to retain the debt headroom to keep this
New Zealand economy in strong order by spending much harder if he has
to in future years. The New Zealand Treasury has near-identical
sentiment, noting in its Budget update that we are particularly
affected by changes to external flows of goods, services and finance:
The outlook for world growth is fragile and has become more
uncertain. Trade tensions and a range of country-specific factors have
seen global growth slow over 2018, with higher frequency indicators
suggesting this weakness has persisted into 2019. The set of forecasts
presented in this chapter assume a stable outlook for trading partner
growth, albeit at a lower rate than experienced over recent years.
Risks to the international outlook remain prevalent and skewed to the
He’s going to need it. Winter’s coming.
With the United States – China trade war well underway, the sick chaos
of Brexit is shrinking the U.K. economy and slowing much of Europe’s economy, and smaller economies such as that of Mexico in the crosshairs through further politically manufactured trade disputes, the second half of this year looks for New Zealand nowhere near as rosy as the first half.