Donald Trump's aggressive trade policies encourage Chinese President Xi Jinping to respond in kind. Photo / AP
COMMENT:
The escalating US/China trade war could have serious implications for New Zealand.
The first potential problem is that it might stall global trade and tourism growth, which have been major contributors to New Zealand's strong economic performance in recent years.
Trade is particularly important because exports represent 26 per cent of our GDP, according to standardised OECD figures, compared with 20 per cent for China and only 12 per cent for the United States.
The second issue is that a major global trade war may require us to choose between the United States and China, a particularly difficult choice because of the potential backlash from the rejected country.
These are unwelcome developments because the past three decades have been characterised by a huge increase in global trade and the demise of centralised governments, particularly the communist regimes of the late 1940s to early 1990s era.
During this 40-year period, countries had to decide whether they would support the free-enterprise or communist blocks. This was an easy decision for New Zealand and most other countries.
Although China continued to have a communist government, it has moved slowly from centralised decision-making to a greater emphasis on free-enterprise principles.
Thus, the 1990s, 2000s and early 2010s were characterised by trade liberalisation whereby China, and other countries, could trade with who they wished and for airline companies, and tourists, to fly to their preferred destinations. Before this, airline routes were almost totally determined by bilateral agreements between governments.
However, there has been a clear change since the election of several populist leaders, particularly President Donald Trump. Trump has taken the US down a more centralised decision-making route with his executive orders and Twitter announcements.
Reports from the US last week indicated that Trump has decided to levy tariffs on an additional US$300 billion worth of Chinese goods, beginning on September 1, against the advice of his close associates.
A Washington Post headline declared "Trump is increasingly relying on himself — not his aides — in trade war with China". After the Chinese subsequently depreciated their currency by 2 per cent, the US President tweeted that the Chinese Government was "trying to steal our businesses and factories".
The problem with Trump's aggressive policies is that they encourage a similar response from Chinese President Xi Jinping, who doesn't want to appear weak to his senior party officials and the Chinese people.
There is also a strong possibility that Trump will demand loyalty from his allies if the trade dispute escalates, as he seems to see everything in black or white and people are either with him or against him.
The Chinese Government also demands loyalty and still makes centralised decisions, as demonstrated by its order to state-owned organisations to stop purchasing US agricultural goods in response to last week's US tariff announcement.
The accompanying table illustrates why New Zealand would have had no reason to side with China 20 or 30 years ago, but it is a completely different story these days.
Back in the 1990s, New Zealand had almost no interaction with China.
Exports to that country were only $0.16b in 1990 and $0.54b in 1993, while exports to the US were $1.98b and $2.14b respectively. But since then exports to China have soared to $15.66b, representing 26.4 per cent of New Zealand's total exports for the June 2019 year.
It has been a similar story for imports, as China accounted for $12.95b, or 21.9 per cent, of our total imports in the June 2019 year, with Australia in second position and the US in third place.
These figures clearly demonstrate that China has come from the rear of the peloton, as far as our trading partners are concerned, and is now New Zealand's largest trading affiliate by a wide margin.
If the US/China trade dispute continues to escalate then it could have major problems for New Zealand, particularly as far as agricultural products are concerned. These products are vitally important to the NZ economy as dairy and meat products are our two largest exports, representing $22.8b or 38 per cent of the country's total exports.
If China bans agriculture imports from the United States, then US farmers will be under huge pressure and Trump's response could be to substantially restrict agriculture imports from the rest of the world, including New Zealand.
The flip side is that China may also restrict agriculture imports from New Zealand if its farmers come under pressure because of US trade restrictions.
New Zealand's trade negotiations and relations would play an important role under this scenario, including possible concessions to the controversial Huawei Technologies and other large Chinese enterprises.
It could be argued that Huawei is no better or worse than the two US giants, Facebook and Google. It could also be claimed that the only difference between the companies is that Facebook and Google are owned by global pension and superannuation funds while Huawei has a relatively secretive ownership structure.
Although Australians still dominate New Zealand's passenger arrival figures, there has been a massive increase in Chinese arrivals, mainly tourists, over the past 20 years.
Annual Chinese passenger arrivals have soared from a minuscule 2323 in 1990 to 83,934 in 2005 and 421,113 in the June 2019 year.
Chinese visitors have been major contributors to the inbound tourism boom over the past decade.
In 2000 and 2005 there were no direct flights from Beijing, Guangzhou and Shanghai to New Zealand, but this increased dramatically to 256 direct flights in 2010, 1065 in 2015 and 1781, or nearly five a day, in the latest 12-month period.
The China/New Zealand relationship has strengthened in several other areas including:
• China has the most foreign students in New Zealand with 35,400, ahead of India and Japan
• China is the number one country as far as our permanent net long-term migration inflow is concerned, slightly ahead of India but well ahead of the US
• Ten years ago, Chinese was the fourth most popular foreign language in New Zealand schools, but it is now in a clear first position after passing German, Spanish and Japanese
• China ranks in fifth place as far as total inbound foreign investment is concerned behind Australia, the UK, the US and Hong Kong.
Any requirement to choose between China and the US will be extremely difficult because the Asian giant is clearly our main trading partner while we have had closer historical and cultural ties with the United States.
The preferred situation is that the current world order is preserved, which would enable New Zealand to continue to maintain its existing trading relationships with different countries. Unfortunately, the escalating China/US trade dispute, and the inflexible attitudes of Trump and Xi, could radically transform the current world order and force us to choose between the two.
New Zealand's situation will be made more difficult if UK Prime Minister Boris Johnson and Australian Prime Minister Scott Morrison decide to side with the US.
The Reserve Bank of New Zealand's decision to cut its official cash rate (OCR) from 1.50 to 1.00 per cent is another bizarre decision influenced by populist politics.
Populist politicians and central bank governors are obsessed with taking measures to avoid any form of economic slowdown. This approach, which has been strongly influenced by Trump's pressure on the US Federal Reserve Board, is unorthodox because expansions and slowdowns are an integral part of the business cycle.
The weird 0.5 per cent rate cut by governor Adrian Orr means that our Reserve Bank has more limited options if New Zealand is confronted by a serious recession.
- Brian Gaynor is a director of Milford Asset Management.
Politicians are urged to prioritise unity and decisive action amid economic challenges.