Despite China and the United States continuing talks on trade disputes, President Trump has prepared a fresh set of tariffs on Chinese goods and services.
This is way, way bad for New Zealand.
President Trump going on the offensive just as the Chinese negotiating team war on their way to Washington was a typically aggressive negotiating move.
Each time that Trump has imposed tariffs on Chinese products or set a deadline for the ongoing negotiations, global business including New Zealand’s exporters have quivered in fear.
But most investors looking at China also reflect an infantile naivete when it comes to the true nature of the communist state.
I think it was Lenin who said “When the time comes to hang the capitalists, they will bid against each other for the sale of the rope.”
Thus, the negative reaction of New Zealand’s economy to perturbations in U.S.-China relations can appear overstated. After all our housing market may be cooling, but immigration demand is high, construction demand is high, unemployment is low, our government has plenty of cash in the bank to spend, which may give us reason to remain confident for now.
It’s not a crisis, but if you pop down to Queen Street and ask the souvenir stores and international glamour chains, they all tell you the peak is well off and into decline from tourist numbers.
Chinese-made goods are not selling anywhere near as fast in such places, in part because Chinese tourists who buy them are down.
The truth is, Trump has the power to get tough on China because China’s economy is a paper tiger, so he is.
In December 2018 Chinese exports dropped 4.4%. In January this year it was reported that Chinese manufacturing actually contracted.
Apple blamed this year’s profit downgrade on China’s economy.
China’s financial situation is far more risky than many credulous Western observers care to admit. Once you put aside the official propaganda that literally pours from various media and government organs, the sad fact is that China is really not growing nearly as fast as many western observers believe.
And the Chinese system is drowning in “debt” that will never be repaid.
While the Chinese government “targets” 6 to 6.5 percent GDP growth for 2019, much of this activity is simply a function of government spending rather than private sector economic expansion.
This kind of downgrade hits New Zealand hard twice, because it hits Australia really hard.
In 2017-18 China was by far Australia’s largest trading parter. That’s coal, iron ore, and tourism.
The two economies New Zealand is most vulnerable to are Australia and China. We are a branch of the Chinese economy directly, and through Australia indirectly.
Simon Birmingham, the Australian trade minister, has warned Australian consumers will end up paying more as a result of the tariffs.
“We shouldn’t overstate it – we shouldn’t be alarmist – but the downside risk for Australia is material.”
Our Reserve Bank statement this week noted that “A key downside risk relating to the growth projections was a larger than anticipated slowdown in global economic growth, particularly in China and Australia, New Zealand’s largest trading partners.”
Last year was the 10th anniversary of our free trade agreement with China.
Our economy remains brittle because our reliance on China is through the one main business that was supposed to benefit form that agreement: Fonterra.
Fonterra accounts for 36% of the entire world’s dairy exports into China, and 26% of Fonterra’s output goes to China.
China is buying up dairy processors here in direct competition to Fonterra, and Fonterra is continuing to fail inside China.
By a country mile it is New Zealand’s largest local business, and Fonterra is weak and getting weaker. Dairy, meat, forestry: China dominates us in those core fields of our export economy.
Even in tourism, MBIE has forecast that in just three years China will be our number one market for tourists.
Like Australia, New Zealand’s economic fortunes rest on China’s fortunes.
President Trump is seeking to actively weaken the Chinese economy in favour of the U.S. economy, which in turn weakens us.
We are major collateral damage to Trump.
President Trump shows from all his international dealings that he is unable to make international deals of any kind, and that is the case with China right now.
Nor is there real political will on the Chinese side to do so. China’s communist party is not going to dismantle its state-led system, deeply autocratic political control of much of its economy and its society, and the industrial policies which have led to trade war with the United States in any substantial way.
The authoritarian nature of the Chinese economy not only retards the country’s true potential but makes real “peaceful coexistence” with developed, open societies and open market economies like ours deeply problematic.
Since China’s economic policies are ultimately driven by the political insecurity of the CCP, the results of government spending are neither satisfactory nor enduring.
Whether the Chinese equity markets go up or down is a matter of massive importance to us, and largely indifference to the CCP.
Market movements in the United States (and New Zealand and Australia), lead directly to changes in the outlook for the economy. In China, on the other hand, rising slack in the economy simply leads to more state-directed expenditures.
This fundamental difference in the nature of the U.S. and Chinese systems makes it difficult to fashion an understanding on trade issues that is truly workable.
Unless and until the CCP is removed from power and the people of China are truly free, there is no way for the United States and active open democracies and economies like New Zealand and Australia to fashion an abiding and workable partnership with Beijing. The fact that this is a shocking and undiplomatic thing to say shows how cowed our society and our government have become to China.
Our vulnerability to China is being exposed through the U.S.-China trade talks as never before. It is most likely that this will get much, much worse.
Update: Now that these talks have failed as of Saturday night, the risk of an all-out trade war between China and the United States has now massively increased.
Tariffs on US$200 billion of Chinese exports increased overnight.
Vice Premier Liu He is in Washington this week. President Trump is not meeting with him.
It is most likely that this will get much, much worse.
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