The terms of trade is a measure of the international purchasing power of New Zealand's exports. An increase means this country can buy more imports for the same amount of exports. You could think of it as how many barrels of oil or TVs you'd get for a container of milk powder.
Over the past year the terms of trade has been running around 20 per cent above its average over the past 20 years. The all-time high was recorded in the December 2017 quarter.
Yet despite this extremely advantageous mix of export and import prices, we have been running stonking great trade deficits.
Nor can we blame the exchange rate. The average level of the kiwi dollar's trade-weighted index over the past year has been smack in the middle of its range over the past 10 years. It was much higher in 2016 and higher still in 2014.
If this is the best we can do with a strong wind at our backs, how will we fare as the trade winds veer round 180 degrees to a gale-force southerly headwind?
It reflects a continued reliance on exporting bulk commodities with little value added, like milk powder or raw logs.
Adding value to those exports before they leave our shores would require investment, and as a nation and as a people, we are far more inclined to borrow than to save, to consume than to invest.
This is not a moral failing; it is just the rational response to the incentives the tax system has given us since the 1980s (and which the Cullen tax review would only have made worse).
The above is all about the trade in goods. A more cheerful picture emerges if we include trade in services.
A consistently positive balance of trade in services — mainly tourism, but also export education — has been offsetting the structural merchandise trade deficit.
The most recent balance of payments data (for the year ended March) show the surplus on services covered all but $100 million of the goods deficit. The trouble is, there are signs the tourism boom is waning.
Adding value to those exports before they leave our shores would require investment. Photo / 123RF
In the year ended June, visitor arrivals grew by the slowest rate for six years, underpinned by an 8 per cent decline in the number of tourists from China, the second largest source after Australia.
Tourism, after all, is a luxury trade. Everyone has to eat, but people don't need to climb in a plane and travel long distances to admire our mountains.
As the world economy slithers towards recession, you would have to expect tourism to take a hit.
The World Trade Organisation — a body the Trump Administration seems intent on neutering — reports that over the past 10 years world gross domestic product and merchandise trade volumes have grown in lock-step, by a cumulative 26 per cent in both cases.
But protectionism is on the rise and growth in world trade is slowing accordingly. Year-on-year growth in the volume of world merchandise trade fell from 3.9 per cent in the first half of 2018 to 2.7 per cent in the second half of the year, the WTO says.
Since then the Sino-American trade war has seen further tariff increases, while in Europe, Germany is on the brink of recession and Britain — still the world's fifth largest economy, though probably not for much longer — is going through some kind of mental breakdown.
A no-deal Brexit would throw up barriers to two-thirds of its trade, not only the half which it conducts with the EU27, but another sixth which is with countries that have preferential trade agreements with the EU.
Nouriel Roubini, one of the few economists who saw the global financial crisis coming, warns that if the mounting tensions between the United States and China over trade and technology were to trigger a recession next year, it would be of a kind where the traditional monetary and fiscal policy remedies would be of limited use. They could provide pain relief but not treat the underlying problem.
It would be a negative supply shock, akin to the oil shocks of the 1970s or 1990, pushing up the cost of producing stuff, as distinct from the collapse of aggregate demand in the credit-crunching aftermath of the GFC.
Sino-American rivalry is already driving a broader process of deglobalisation, Roubini says, because countries and firms can no longer count on the long-term stability of the border-crossing integrated value chains, which have lowered production costs.
So far, the effects have been felt as a drop in business confidence and investment.
"[But] should the price of imported goods rise further as a result of any of these negative supply shocks, real disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into recession," Roubini says.
The risk is of a "Balkanised" world economy where, instead of a rules-based system, the law of the jungle or something like gang rivalry prevails.
For a small, open economy like ours it is a grim prospect.
