No Minister

The spoon is long enough

In the spirit of blogs supporting one another I urge readers to read this rather long article, Economic Coercion, over at the Croaking Cassandra blog site run by economist Michael Riddell.

The article deals with the question of whether New Zealand can afford to confront China over its actions in recent years, specifically in the South China Sea and with its Uighur minority.

Most articles have focused on the geo-political and human rights aspects of these actions, of which this article over at the Kiwipolitico blogsite, by foreign policy analyst Paul Buchanan, Facing Facts, is a good example. I recommend you read it also. Buchanan argues that the 5-eyes partnership is not going away and is not going to be materially affected by any frictions that may arise between the partners in dealing with China. He also points out that China has nothing like the 5-eyes network but is instead reliant on old-fashioned human intelligence. But he also includes this piece regarding our economic relationship:

New Zealand is now essentially trade dependent on the PRC. Approximately 30 percent of NZ’s trade is with China, with the value and percentage of trade between the two countries more than tripling since the signing of the bilateral Free Trade Agreement in 2008. In some export industries like logging and crayfish fisheries, more than 75 percent of all exports go to the PRC, while in others (dairy) the figure hovers around 40 percent.

The top four types of export from NZ to the PRC are dairy, wood and meat products (primary goods), followed by travel services. To that can be added the international education industry (considered part of the export sector), where Chinese students represent 47 percent of total enrollees (and who are a suspected source of human intelligence gathering along with some PRC business visa holders).

Buchanan argues that this is why, in her recent “Taniwha and Dragon” speech, our Minister of Foreign Affairs was subtly saying that New Zealand needed to diversify away from China, without actually sticking it to them in a way that would get their backs up. I’m not sure I would read that much into such “subtlety” as it appeared to be one small sentence rather than a sustained argument and as such it amounted to the bleeding obvious.

Riddell’s expertise is economics and his article tackles this assumption, quoting National’s Gerry Brownley for a start:

“But you have got to bear in mind that there are hundreds of thousands of New Zealanders at work today largely because of our trade with China. It is not a simple matter, it is not a straightforward matter, it is one the Government should definitely have a position on.”

But as Riddell points out, statistics like “30 percent of NZ’s trade” can be deceptive:

And, yes the PRC recently moved a bit ahead of Australia as the country where the most two-way trade is done with, but – as people have noted for decades – one notable thing about New Zealand is that our trade isn’t very concentrated with any single other country/region (much less so than is the case for Australia). Total New Zealand exports to China, pre-Covid, were about 5 per cent of GDP.

Moreover, he points out that coping with economic blows from general things like recessions in the USA, or China, is what we try to do all the time, and what our systems are set up for:

A severe and sustained recession in China would represent a significant (but cyclical) blow to the world economy, and to New Zealand – and would do so whether or not New Zealand firms traded much directly with PRC counterparts. That is also true – as we saw in 2008/09 – of severe US recessions. That sort of shock – and others like them, at home or abroad – is why we have a floating exchange rate and discretionary monetary and fiscal policy.

And this is before we consider the rather strange fact that…

… contrary to the rhetoric about being a “small highly open economy”, actually the share of our economy accounted for by foreign trade (exports and imports) is (a) much less than one would normally expect for a country our size, and (b) has been shrinking. 

Like Buchanan he lists the areas of exposure as export education, tourism, and our commodity exports of dairy, forestry, meat, and seafood, and then looks at those specifically, noting in particular that the first two would be the ones most exposed to China, but which have already been dealt a huge blow by Covid-19 anyway so at present they’re not a factor when thinking about Chinese retaliation.

Riddell acknowledges the obvious, which is that specific businesses could get hurt, but there are some general economic aspects that apply.

The world price for commodity products is determined by world demand and supply conditions, a point given far too little attention in the timid New Zealand discussion of PRC issues.

To a very large extent, countries (all of them) make their own prosperity (or lack of it).

China didn’t make us rich or poor. It made China first (last century) poor, and eventually middle-income.

In other words, the argument that our FTA with China “saved” us after the 2008/9 recession, is a myth in the face of the fact that our total trade share of GDP was falling not rising over this period, that New Zealand’s productivity performance over this period was woeful, and that it took 10 years for our unemployment rate to get back to pre-recession levels.

By the same token, China is not actually in a position to “punish” us if we speak out against some of the things they’re doing. Riddell takes the specific example of Australia, much in the news recently as having been given some of that punishment. Again, there are specific businesses that have been hurt. However:

What we don’t see is any sign of severe economywide consequences: there is no mention of the issue (or risks) in the Reserve Bank of Australia’s latest (lengthy) minutes (by contrast, changes in New Zealand population growth actually get a mention). It seems to a third-order issue at a macroeconomic level – and the overall economy is what governments should be thinking about when they consider economic risks and consequences.

Of course, people will point out that China has not yet tried sanctions on Australian iron ore (but they did with coal, only to run into problems, because they still needed coal).

Australia, has 30 per cent of the world’s iron ore reserves (and a larger share of production) and China currently consumes a very large share of world iron ore production, so how badly are the Chinese willing to hurt themselves? The classic problem for people who want to use trade as a weapon is that you end up punishing yourself. Admittedly that may worry the CCP less than it would a democratically elected government, but even the CCP treads carefully when it comes to economically screwing over its people. Riddell makes that point in looking at the specifics of some of the other countries that China has targeted and notes the gap between China’s demand for dairy products and their local production.

He also makes the point that while these firms might have warranted sympathy a few years ago when these issues were not present and coercive tactics were not known, they are now trading with their eyes wide open to the risks and if they continue to do so that is no reason for a New Zealand government to cover for them.

He sums it up:

… we have macroeconomic policy for, fiscal and monetary, to help smooth the economy in the face of disruptions, whether Covid, coercion, or whatever.

Whatever the potential disruptions for individual firms – and they are real (for them) – it simply is not credible – given the (smallish) size of our total exports, the commodity nature of most, the share of trade with China – that any sort of conceivable economic coercion would represent a serious sustained threat to the New Zealand economy.

It’s worth that cost to confront the PRC about the stunts they’re pulling, and if they want to punish us then we’d be better off reducing our exposure with them anyway.

For the last twenty years I’d hoped that trading with China might soften the CCP’s approach to things: not that I expected them to become a democracy, but that they’d go easy on Hong Kong (as they did for twenty years) and Taiwan. And for a while – especially with term limits applied to their Communist party General Secretaries, which while not exactly democracy, at least had the same effect of preventing the rise of the usual Communist cult-of-personality – it seemed to be okay, as former Australian PM, Tony Abbot pointed out in recent article in The Australian. He had the same hopes most of us had.

But the rise of Xi Jinping has changed all that. The trade approach hasn’t worked. Worse than that, rather than us exporting our values to China they’re exporting theirs to us, primarily the choice to throw our morals and ethics to the floor for the sake of money. It worked with the Chinese people after Tiananmen Square and the CCP leaders are betting it will work with us too.

So far they’re right.

Written by Tom Hunter

May 2, 2021 at 6:00 am

2 Responses

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  1. More “yellow peril” stuff

    The “Great Game” is as old as humanity.

    But do the USA or the UK have have much to admire about them at this point in Human History? In the past for sure great men built a great, though far from prefect societies but today we are pulling their statues down

    What happened to Reagan’s Shining g City on Hill? That is a Biblical reference BTW

    the 2020 Presidential Election in the USA showed American democracy is a farce and now the country is in the hands of a gerontocracy nominally led by a feeble old man supported by a clutch of mad geriatrics, while the inner cities burn and large numbers of her citizens turn to drugs to obliterate the grim reality of their everyday lives

    The center of gravity in World Affairs is moving from the English speaking World to the Far East, I lament this as much as you do but it wont be stopped by dick wagging in the South China Sea with Aircraft carriers the USA cannot afford and neglect their own citizens needs to pay for

    The things that give people a rich and fulfilling life, the Family, Church, meaningful work are all being systematically dismantled in the West.while various political grifters are turning us against one another on the basis of race and o a less extent other assorted identity features , in part as a divide and conquer strategy and in part to deflect attention from own their failures in improving the lot of the lower stratums in society

    Хрїсто́съ воскре́се! – Вои́стинꙋ воскре́се!

    Andrei

    May 2, 2021 at 8:24 am

  2. More “yellow peril” stuff

    The “Great Game” is as old as humanity.

    That sounds like the sort of dismissal that leftists applied to the USSR from the 1970’s on; that the Cold War was really just the “Great Game” redux, and pointing to the “Russia Scares” of the late 19th century, of which the various gun emplacements around Auckland are an example.

    The intention of such criticism was to try and deflect away from the fact that the USSR’s communist system was something very different than the old Czars, and a lot nastier and dangerous too.

    Same here. The CCP has elements of the centralised, bureaucratic, technocratic style of government that has been every government of China for three thousand years, but it is different and it is dangerous.

    While I can’t see China going for any sort of formal empire building beyond her borders via the traditional route of military attacks and takeovers – as much a matter of pragmatism as its tradition of remaining within its borders – the fact is that it is trying to build an informal empire via things like its Belt and Road plans; loaning money to poor nations to build infrastructure and then swapping the debt for the built asset. As well as things like gaining economic control such as the recent deals with the ports of Melbourne, Darwin and Newcastle.

    Then there are things like the following, which is just plain, simple, nasty propaganda of a type you rarely see between other nations states: ’Lighting a fire in China vs lighting a fire in India’

    Tom Hunter

    May 3, 2021 at 10:04 am


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