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Spitting the dummy, and changing the international order

US president Donald Trump has been spitting the dummy. Most of the toys are now out of the cot.

Other people have been picking up those toys. Prepare for massive change in the international order.

This article is about fundamental changes which are likely to occur – I say likely, but there will be plenty of scrambling to prevent it – and how things might pan out.

One factor in the changes is a simple process of counting quotas, with worldwide implications.

Another factor is Mr Trump & his desire to open acrimonious fights. The latest revelation on that front was about a border patrol agent who died in December. Mr Trump used the event to promote his wall fronting Mexico, saying the agent had been “lost” [as in died] and his partner “badly beaten”, although the partner had radioed in that he thought he’d hit a culvert and investigators found no evidence of any other cause. Texas governor Greg Abbott offered a reward “to solve this murder”. By the time the story reached the Fox News airwaves, illegal immigrants had bashed the first agent to death with rocks.

You might consider that incident a minor side issue in the international scheme of things, except that it’s a standard ploy and it colours expectations of Mr Trump’s behaviour in other forums.

On top of some other factors already in play – currency, the sharemarket rollercoaster (particularly US, but internationally), some trade conflicts and some trade aspirations – I’ve followed through on some wider trade questions, examined how the international applecart might be completely overturned, and provided you with some sections of text where you can use your own judgment on what people & institutions are saying.

Those pieces of text are:

  • a repeat of the opening to my newsletter last Wednesday
  • part of an article by Russian president Vladimir Putin, and
  • segments of the BRICS summit declaration last September.

If you’re like me, most of your sources for international matters will be American. Your choice then is to go left (or our right, depending on your view of how people lean in the US), right (or further right, if like me you think there’s not much that’s truly on the left), or, if you have a lot of time, hunt for something in the middle, neutral, balanced, can be substantiated.


We have this constant focus on the US because of the oh-so-frequent outbursts from its oh-so-remarkable president, but the game is getting serious.

One occasion, which will tell how serious, occurs on Friday-Sunday 20-22 April, when the International Monetary Fund (IMF) & World Bank Group hold their joint annual spring meetings in Washington.

Since the IMF was founded in 1945, the US has held a power of veto (over 15% of the vote). After the latest adjustment of quotas, the 5 BRICS nations (Brazil, Russia, India, China & South Africa), combined, will also have veto potential.

I’ve been following the writings (sometimes rants) of Jim Rickards (lawyer, economist, financial writer, editor of Strategic Intelligence) via the Daily Reckoning website (and also the separate website of Daily Reckoning founder Bill Bonner), and last year Mr Rickards was convinced the change in power at the IMF would result in its special drawing rights usurping much of the $US’s role in international exchange.

It didn’t happen, but that may be just a matter of timing for processes to be completed. Or, if the 5 aren’t yet ready, they may hold off for another 6 months or a year.

However, Mr Rickards is at it again, this time pointing to that April meeting of the IMF where, he says, the BRICS nations’ combined voting strength will rise from 14.2% to 16.21%, while the US vote will fall from 16.54% to 16.44% – still veto power for the US, but with fewer mates in support of its case.

Privileges & power written in for US

Among the privileges the US has had for decades, its greenback has held primacy as the international reserve currency. Primarily through the BRICS relationship, Russia & China began using their own currencies for trade between them last year, and both Russian president Vladimir Putin & the BRICS summit declaration point to more of that, plus changes along the lines of this statement from the summit declaration: “We resolve to foster a global economic governance architecture that is more effective & reflective of current global economic landscape, increasing the voice & representation of emerging markets & developing economies.”

Under the old order, that would have been squashed in a backroom, although official statements wouldn’t have put it quite that way.

China has also signed currency swap agreements with over 20 other countries, setting the greenback’s role aside in each case. To demonstrate how this matters, Mr Rickards pointed to the US love affair with cars – and the price of fuel, which has long been far lower than anywhere else in the developed world: “Why do we pay less? Because oil is priced & purchased in our dollars.”

Here’s the exercise in today’s money: US gallon = 3.785411784 litres, $US1 = $NZ1.38, average US petrol price currently $US3.12/gallon of premium 91-octane unleaded according to the American Automobile Association, = $NZ1.14c/litre. Auckland price currently? Around $2/litre.

Pointing the finger – but the backing is shrinking

President Trump has accused China, in particular, of currency manipulation & theft of intellectual property and has pressed for sanctions against Chinese suppliers of washing machines & solar modules, and Canada on lumber & dairy products. US airline maker Boeing tried too, but failed in a bid to have heavy tariffs imposed on Canadian planemaker Bombardier.

Broadly, in addition, any sign that a foreign company has an element of government ownership will mean it can be targeted for “unfair” competition.

Trump wants one-on-one, others work on multi-partnerships

Mr Trump rejected the Trans Pacific Partnership, which still favoured US corporates after much negotiation, and wants changes to the North American free trade agreement with Canada & Mexico.

Meanwhile, other countries are moving into multi-partner relationships – both for constructive trade reasons and, particularly now, as protection against a wild card.

Now, you have a revised TPP being finalised without US involvement, the BRICS nations are gradually starting to get a multitude of joint activities underway, and China is working on closer relations across Central Asia, into Europe and into Africa through its reinvented Silk Road, the “one belt one road” of land & sea routes.

The international reserve currency question is a big one. The move away from the greenback has already begun, and could accelerate quickly if the IMF goes the BRICS nations’ way. The US administration could find itself a rock on the road, being driven into the ground by every other nation.

US trade & infrastructure parked on a tightrope

While Mr Trump has talked jobs for struggling areas of the US and promoted exports, the official unemployment rate has been falling (with a couple of blips) for 2 years and has been at 4.1% for 4 months, and average hourly earnings have crept up 2.9% in the last year. He wants a low exchange rate to be internationally competitive, and low interest rates to keep the cost of federal debt down, but can expect inflation if the economy continues to improve (net of stimulation-targeting debt injections).

To get his massive infrastructure programme underway, Mr Trump wants local contributions of about 80%, federal no more than 20%. Previously, infrastructure programmes have been directed through the federal coffers, and neither states nor cities will have the funds to meet this changed requirement.

Swat: Deal “non-existent”

As an example of how the whole idea of continuity, forward planning for project funding and acceptance outside the presidential palace of how everything’s supposed to work, CNN Money ran a story at the end of January on how all that smart thinking can be upended: “Deep underneath the Hudson River between Manhattan & New Jersey lies a century-old rail tunnel, heavily damaged during Superstorm Sandy, that still carries 200,000 riders/day.

“Engineers say the tunnel should be replaced as soon as possible, at a cost of $US12.7 billion. In 2015, the Obama administration agreed to supply half the funding for it, and designs are nearly complete. But in December, President Trump’s Federal Transit Administration sent a letter to the Port Authority of New York & New Jersey declaring the deal ‘nonexistent’.”

Mr Trump has been intent on unwinding every measure his predecessor, Barack Obama, put in place, but CNN said this rail tunnel project had implications for travel through both Democrat- & Republican-voting districts.

Congress set up a commission in 2010 with Amtrak & mid-Atlantic governments as partners, which put a $US38 billion price tag on repairing the north-east corridor line. The House of Representatives approved a $US500 million “down payment” last year to start the repairs, but CNN said the Senate approved only $US26 million, no agreement has been finalised, and added this most important factor in the politics of US public money: “The North-east Corridor is now at a political disadvantage in Washington because it connects Democratic cities with limited influence.”

The North-east Corridor Commission has estimated shutting the service down – not by choice but for danger or damage – would cost the US economy $US100 billion/day.

The original letter from New York state budget office director Robert Mujica was cursory, mentioning progress being made but saying nothing about agreement reached by 2 states on their proposed shares of the cost. On New Year’s Eve, Mr Mujica wrote a longer explanation, but it seemed he was responding to a “don’t want to” federal letter.

Under the terms so far revealed of the Trump infrastructure plans, the 7 years of planning for this major work will have been wasted, but other states might also not be able to take up the offer if they can’t source enough funds locally.

With US public debt escalating beyond $US20 trillion, the local & state governance structures militating against early starts, the potential for an early collapse in soaring sharemarket prices, and big changes in international economic structures, the Trump infrastructure programme looks in danger.

Buy American law: blatantly protectionist

While I was looking for the original correspondence to balance the portrayal by CNN (which didn’t mention the numerous questions raised by the federal transport official, deputy administrator Jane Williams), I spotted a piece of New York state legislation passed on 15 December, the New York Buy American Act, requiring state entities to include a contract provision requiring the use of US-made structural iron & structural steel for all surface road & bridge projects.

One of the most contentious clauses in the Trans Pacific Partnership documents when the US was still involved in writing it – the investor-state dispute settlement provision – was designed to combat this kind of lopsided trade law.

The New York law is blatantly protectionist legislation – just one of the 6 state senate & assembly leaders quoted in Governor Cuomo’s release thought product quality was an important ingredient worth mentioning.

Making sense of a complicated picture

That, I think, sets a picture more fully than the newsletter lines I wrote last week (repeated below). In short:

  • Lines of finance could change, though that might take longer than some of the other potential & likely changes
  • Trade directions could be radically altered, by positive additions such as the central Asian growth, and by negatives such as the influence of internal US bickering
  • The cost of money, or the currency of trade, or both could change
  • US leaders’ behaviour may reinforce other nations’ determination to take their trade elsewhere, and
  • US infrastructure-related businesses, unable to function properly at home, may look (at least short-term) for work elsewhere.

Click to read page 2: Spitting the dummy page 2: Putin, BRICS & last week’s summary

Earlier story:
31 January 2018: Trump changing longstanding rules of play on infrastructure

BRICS 2017
4 September 2017: BRICS leaders’ Xiamen declaration
1 September 2017, Vladimir Putin article: BRICS: Towards New Horizons of Strategic Partnership
Jim Rickards on Collide (subscription required)
CNN Money, 26 January 2018: The biggest infrastructure nightmare facing the US
29 December 2017: Federal Transport Department letter to New York state budget director
31 December 2017: New York state budget director response to Federal Transport Department
14 December 2017: Governors Cuomo & Christie announce commitment to fund 100% of states’ half of new Gateway tunnel
13 December 2017: New York state budget director letter to Federal Transport Department outlining funding agreement progress
New York governor Andrew Cuomo, 15 December 2017: Governor Cuomo signs “Buy American” legislation for all structural iron & steel on New York roads & bridges
Washington Post, 9 February 2018, opinion article by Dana Milbank: Trump concocted a story about a border agent’s death. The truth won’t catch up.

Attribution: BRICS, Vladimir Putin, Jim Rickards, CNN Money, New York State, US Federal Transport Department, Washington Post.

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Spitting the dummy page 2: Putin, BRICS & last week’s summary

Click to read page 1: Spitting the dummy, and changing the international order

Vladimir Putin at the BRICS summit.

Russian president Vladimir Putin wrote an article days before the September 2017 summit of the 5 BRICS nations (Brazil, Russia, India, China & South Africa) in Xiamen, China, espousing views on economic issues – and on a wide range of other matters of international politics, but especially on an extremely wide range of potential areas of co-operation among the 5.

The central message was this: The balance of power is changing.

For the BRICS partners, there was a call to work together in many spheres, which sounds enlightened & constructive but also faces many obstacles.

For New Zealanders, whose primary sources of foreign information used to be British and are now mainly American, it may take suspension of belief to digest the following statements and to accept them at face value, but that’s not why I’ve run them.

The reason they’re here is to show you the stated intent ahead of highly significant changes which may start to emerge in 2 months.

Key points of the Putin message:

“Russia highly values the multifaceted co-operation that has developed within BRICS. Our countries’ constructive co-operation on the international arena is aimed at creating a fair multipolar world and equal development conditions for all.

“Russia stands for closer co-ordination of the BRICS countries’ foreign policies, primarily at the UN & G20, as well as other international organisations….

“Russia also calls for promoting the interaction of the BRICS countries in the area of global information security. We propose joining our efforts to create a legal basis for co-operation and subsequently to draft & adopt universal rules of responsible behaviour of states in this sphere. A major step towards this goal would be the signing of an intergovernmental BRICS agreement on international information security….

“Russia is interested in promoting economic co-operation within the BRICS format. Considerable practical achievements have been recently reported in this area, primarily the launch of the New Development Bank (NDB)….

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial & economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies. We will also work towards a more balanced distribution of quotas & voting shares within the IMF & the World Bank.

“I am confident that the BRICS countries will continue to act in a consolidated manner against protectionism & new barriers in global trade. We value the BRICS countries’ consensus on this issue, which allows us to more consistently advocate the foundations of an open, equal & mutually beneficial multilateral trade system and to strengthen the role of the WTO as the key regulator in international trade.”

Other BRICS leaders joined the charge

The 5 BRICS leaders followed those Putin lines of thinking in their joint summit declaration 4 days later:

“… 10. We agree to promote the development of BRICS local currency bond markets and jointly establish a BRICS local currency bond fund, as a means of contribution to the capital sustainability of financing in BRICS countries, boosting the development of BRICS domestic & regional bond markets, including by increasing foreign private sector participation, and enhancing financial resilience of BRICS countries….

“11. In order to serve the demand arising from rapid growth of trade & investment among the BRICS countries, we agree to facilitate financial market integration through promoting the network of financial institutions and the coverage of financial services within BRICS countries, subject to each country’s existing regulatory framework & World Trade Organisation (WTO) obligations, and to ensure greater communication & co-operation between financial sector regulators…. We agree to communicate closely to enhance currency co-operation, consistent with each central bank’s legal mandate, including through currency swap, local currency settlement, and local currency direct investment, where appropriate, and to explore more modalities of currency co-operation. We encourage the BRICS interbank co-operation mechanism to continue playing an important role in supporting BRICS economic & trade co-operation. We commend the progress in concluding the memoranda of understanding among national development banks of BRICS countries on interbank local currency credit line and on interbank co-operation in relation to credit rating….

“22. We appreciate the efforts & contribution of the BRICS Business Council & Business Forum to strengthening our economic co-operation in infrastructure, manufacturing, energy, agriculture, financial services, e-commerce, alignment of technical standards & skills development….

Changing global economic governance

“29. We resolve to foster a global economic governance architecture that is more effective & reflective of current global economic landscape, increasing the voice & representation of emerging markets & developing economies. We reaffirm our commitment to conclude the IMF’s 15th general review of quotas, including a new quota formula, by the 2019 spring meetings and no later than the 2019 annual meetings. We will continue to promote the implementation of the World Bank Group shareholding review.

“30. We emphasise the importance of an open & resilient financial system to sustainable growth & development, and agree to better leverage the benefits of capital flows and manage the risks stemming from excessive cross-border capital flows & fluctuation. The BRICS contingent reserve arrangement (CRA) represents a milestone of BRICS financial co-operation & development, which also contributes to global financial stability. We welcome the establishment of the CRA system of exchange in macroeconomic information (SEMI), and the agreement to further strengthen the research capability of the CRA, and to promote closer co-operation between the IMF & the CRA.

Looking to change in Africa

“31. We welcome the establishment of the NDB Africa regional centre launched in South Africa, which is the first regional office of the bank. We welcome the setting up of the Project Preparation Fund and the approval of the second batch of projects. We congratulate the bank on the ground-breaking of its permanent headquarters building. We stress the significance of infrastructure connectivity to foster closer economic ties & partnerships among countries. We encourage the NDB to fully leverage its role and enhance co-operation with multilateral development institutions including the World Bank & the Asian Infrastructure Investment Bank as well as with the BRICS Business Council, to forge synergy in mobilising resources and promote infrastructure construction & sustainable development of BRICS countries.

“Open & inclusive”

“32. We emphasise the importance of an open & inclusive world economy enabling all countries & peoples to share in the benefits of globalisation. We remain firmly committed to a rules-based, transparent, non-discriminatory, open & inclusive multilateral trading system as embodied in the WTO. We reaffirm our commitments to ensure full implementation & enforcement of existing WTO rules and are determined to work together to further strengthen the WTO. We call for the acceleration of the implementation of the Bali & Nairobi MCM outcomes and for the WTO ministerial conference to be held this year in Argentina to produce positive outcomes. We will continue to firmly oppose protectionism. We recommit to our existing pledge for both standstill & rollback of protectionist measures and we call upon other countries to join us in that commitment….

Rebalancing tax

“34. We reaffirm our commitment to achieving a fair & modern global tax system and promoting a more equitable, pro-growth & efficient international tax environment, including to deepening co-operation on addressing base erosion & profit shifting (BEPS), promoting exchange of tax information and improving capacity-building in developing countries. We will strengthen BRICS tax co-operation to increase BRICS contribution to setting international tax rules and provide, according to each country’s priorities, effective & sustainable technical assistance to other developing countries…”

My newsletter Wednesday 7 February:

Stock markets have taken a tumble – no surprise. The question was the timing. Next, though, come 2 important questions: How big will that tumble be (here & particularly in the US)? And what other markets will the stock/bond shifts affect?

Commercial property yields have declined in keeping with the low/zero interest rates, but in many of the world’s markets property investors seem to have been trading for more superficial reasons than with defence against changes in the economic climate in mind….

The second question above – what other markets will be affected, and how? – may be answered with interest rate changes, though central banks will be loath to squeeze… And the availability of debt will be variable, from country to country – and, in this country, affected by the state Australia’s big 4 banks find themselves in…

Will New Zealand’s apartment & general residential markets be affected? Undoubtedly. NZ investors who are in both shares & property will find themselves squeezed on the share side of the equation, affecting their actions on the property side…

Foreign investment in NZ residential property was already about to be curtailed by the new government, immigration is declining slowly, Australia is unlikely to offer a strong economic alternative to the NZ workforce – conditions here are likely to tighten…

Interest rates need to rise (though not by a lot) to bring more sense to markets, but central banks around the word will, instead, be looking at how to turn tricks with debt… In that situation, while uncertainty may reduce property pricing, delay in raising interest rates would put a hold on that change…

Click to read page 1: Spitting the dummy, and changing the international order

Earlier story:
31 January 2018: Trump changing longstanding rules of play on infrastructure

BRICS 2017
4 September 2017: BRICS leaders’ Xiamen declaration
1 September 2017, Vladimir Putin article: BRICS: Towards New Horizons of Strategic Partnership
Jim Rickards on Collide (subscription required)
CNN Money, 26 January 2018: The biggest infrastructure nightmare facing the US
29 December 2017: Federal Transport Department letter to New York state budget director
31 December 2017: New York state budget director response to Federal Transport Department
14 December 2017: Governors Cuomo & Christie announce commitment to fund 100% of states’ half of new Gateway tunnel
13 December 2017: New York state budget director letter to Federal Transport Department outlining funding agreement progress
New York governor Andrew Cuomo, 15 December 2017: Governor Cuomo signs “Buy American” legislation for all structural iron & steel on New York roads & bridges
Washington Post, 9 February 2018, opinion article by Dana Milbank: Trump concocted a story about a border agent’s death. The truth won’t catch up.

Attribution: BRICS, Vladimir Putin, Jim Rickards, CNN Money, New York State, US Federal Transport Department, Washington Post.

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Surveying the international influences

On the one hand Donald Trump, as a disruptive US president trying to change the order of life in his country’s public services, and simultaneously in its trade with the rest of the world.

On the other, bands of nations working towards new economic alliances, often with religious overlays.

In between, the moneymen of Davos, happy to keep state-funded neoliberalism alive & in good heart.

Hanging over the whole scene, a growing mountain of debt which has theoretically lifted economies over the decade since the global financial crisis began but which nobody feels too inclined to reduce to a manageable level.

The world at peace & harmony, developing economically on well founded lines? Or the world at war, so every step forward is rewarded with a slash from angry opponents?

China sets new paths

As Mr Trump tries to reset the rules of trade combat further in his country’s favour, China has embarked on a journey which promises to establish very different trade routes, but with trouble ahead at various outposts on its One Belt One Road update of the old Silk Road & sea passage to Zanzibar.

Every time I look at international events to gauge how – or even whether – they might affect us in New Zealand, the picture shifts, new players emerge and old ones start playing different games. One of the surprises has been immediately west of us – a country where everyone believed for decades that it was impossible for the federal government to destroy the economy – but they did it!

Among the outcomes, for New Zealanders, is that the Australian job market tightened, Kiwis came home and others who would have gone overseas didn’t, pushing net immigration to record highs. Housing demand & supply in New Zealand was pushed further out of kilter than it had already been for the previous decade.

A change for the better in the Australian economy will bring changes in New Zealand – more emigration, the release of housing pressure, and renewed trade opportunities.

Further away – does it matter?

For the rest, does it matter? Or will NZ sail on, oblivious to the changing winds to the north?

I think those changing winds do matter, because they’re going to bring new trade openings, new migrant sources, new partnerships, and they will widen the range of potential investors in this country, which needs investment in the infrastructure to keep our cities moving and our rural economy productive.

Many opportunities along the Silk Road, but…

China looks intent on reviving the Silk Road, which should bring new investment – not just Chinese – to the stans of central Asia, notably Kazakhstan, Kyrgyzstan, Turkmenistan & Uzbekistan. Already, preparations for a combination of the land route across central Asia and the sea route to Africa are bringing new development to Pakistan. At the same time, religious fervour could cripple those opportunities.

Gansu Bank debuted on the Hong Kong stock market 2 weeks ago and its shares have taken off, Ben Kwok wrote in Monday’s Asia Times. The north-west Chinese province of Gansu is in the Silk Road corridor – so, poorer than most of China but changing times.

Asia Times, 29 January 2018: Gansu province poor but a strategic location in BRI

Controlling the zombies

In an Asia Times story yesterday, Gordon Watts picked up detail from a regular statistical release (seeing through the usual fawning language) that indicated China’s many “zombie enterprises”, often owned by local government or the state, “are being closed, merged or forced to slim down after being weaned off a diet of overproduction”.

That is a change that would have huge consequences, internally in the way production is carried out & counted, internationally in China’s trade relationships – including, for instance, the quality of steel it supplies.

Asia Times, 30 January 2018: China tries to breathe new life into corporate walking dead
18 January 2018, Chinese National Bureau of Statistics: National economy maintained the momentum of stable & sound development and exceeded the expectation

National security – or protectionism?

A third Asia Times story yesterday put US-China trade issues together. Citing a Bloomberg article on Monday, the Asia Times wrote about the possible move for the US Government & trusted US or foreign companies to build 5G networks, saying it could hit Chinese suppliers Huawei & ZTE, and the Global Times (a Chinese tabloid published under the auspices of the People’s Daily) criticised “hysteria” & “protectionism’ under the guise of national security.

“The Donald Trump administration is reported to be in talks with private companies to build a secure 5G network and rent out access to domestic telecom carriers due to concerns about Chinese firms & risks to cybersecurity, Bloomberg revealed on Monday, citing 2 anonymous US administration officials familiar with the plans,” the Asia Times story said.

The Asia Times was established in Bangkok in 1995, closed in 1997 days before the Asian financial crisis began to unfold, and is now based in Hong Kong and owned by Asia Times Holdings Ltd.

Asia Times, 30 January 2018: Chinese firms may face lock-out if Washington seals off 5G networks

Singapore now the big investor in US property

Again citing Bloomberg, the Asia Times noted yesterday: “For the first time since 2012, Singapore outspent China to be the largest Asian investor in US commercial property, as deals by Chinese investors plummeted amid a regulatory pressure from Beijing.”

Singaporean sovereign wealth fund GIC Pte Ltd accounted for almost 75% of the $US9.5 billion of deals.

Asia Times, 30 January 2018: Singapore outspends China on US property for first time in years

Redirecting trade policy

President Trump has been pushing hard for manufacturers who supply the US market, especially vehicle makers, to move production lines from Mexico to the US.

He tweeted on Sunday in praise of Fiat Chrysler: “Our economy is better than it has been in many decades. Businesses are coming back to America like never before. Chrysler, as an example, is leaving Mexico and coming back to the USA. Unemployment is nearing record lows. We are on the right track!”

Fiat Chrysler said it wasn’t shutting the assembly plant in Saltillo, Mexico, that currently builds the Ram heavy-duty trucks, but would use the plant to build commercial vehicles it will sell around the world. The company will spend $US1 billion upgrading its plant at Warren, Michigan, so it can produce these Ram trucks there.

CNN is one of the hardest-line US news outlets against the Trump presidency, but its own story indicates both sides of the argument are technically correct.

More importantly, the Christmas tax boost to corporates and the encouragement for them to take their overseas cash holdings home means more local production by US companies and either a change in production or a closedown for their plants elsewhere – unless foreign investors pick up the pieces.

Either way, the US – and Mr Trump in particular – is leading the direction of trade policy. Outfits like the Trans-Pacific Partnership, representing disparate interests, won’t easily combat that sort of confrontation.

CNN, 29 January 2018: No, Mr President, Chrysler isn’t leaving Mexico

And back to Australia

On the Australian MacroBusiness website, columnist David Llewellyn-Smith (Houses & Holes) wrote last week: “The rest of the world is increasingly seized by the notion of ‘global synchronised growth’ but Australia looks increasingly like the odd man out. How did it come to this?”

The answer was short: “It is all of our own doing. At each turn all we needed to do was to manage the real exchange rate & household debt.”

The brief article runs through some causes of the predicament.

Houses & Holes on MacroBusiness, 25 January 2018: Has Australia mismanaged itself out of a global boom?

Attribution: Asia Times, CNN, MacroBusiness.

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Tripartite economic summit opens in Guangzhou

Auckland mayor Phil Goff leads a group of 97 delegates representing 70 Auckland businesses taking part in the third Tripartite Economic Alliance summit which opens today in Guangzhou, China.

2 councillors, finance & performance committee chair Ross Clow and planning committee chair Chris Darby, are also in the delegation.

Mr Goff said before leaving for China: “This will be Auckland’s largest ever trade delegation. Businesses clearly see the advantage of interacting with our 2 sister cities at the summit. Each are gateway cities to 2 of the most important & powerful economies in the world.”

The Guangzhou summit is the last of 3, which started in Los Angeles in 2015 and continued in Auckland last year. However, the 3 city councils have agreed to extend the special relationship for another 3 years with opportunities for interaction between them outside the formal summit process.

The Guangzhou summit runs for 3 days, allowing Auckland businesses to generate partnership & investment opportunities with counterparts from Los Angeles & Guangzhou, and for Auckland to showcase the city as a destination for investment & tourism.

Mr Goff said: “Auckland is New Zealand’s international city and represents 38% of the country’s gdp. As our city grows, investment & business partnerships become increasingly important to it & New Zealand’s future.

“Guangzhou & Los Angeles are global economic powerhouses, as well as a major source of migrants, students & tourists. The formal partnership between our cities creates opportunities for us to facilitate the continued growth of local businesses & our economy.

“The summits provide real economic value & jobs to Auckland, with deals ranging from hundreds of thousands to millions of dollars sealed as a result of the past 2 events.

“For Auckland, those agreements mean more jobs, business expansion, talent coming to our city, and New Zealand innovation & expertise finding new opportunities offshore.”

Mr Goff said the Bank of NZ, Huawei Technologies Co Ltd and NZ Trade & Enterprise were supporting Auckland’s delegation to the summit this year, which had enabled about half the cost of Auckland’s delegation budget to be met by the private sector.

One point of interest for Mr Goff is the Haizhu electric tram: “We are working with government to bring light rail to Auckland as quickly as possible. It’s a good chance to learn from the success of other light rail systems around the world and consider what is the best system for Auckland.”

Link: Summit & tripartite economic alliance

Attribution: Mayoral release.

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Old athletes & Lions drive NZ to slimmer deficit

Statistics NZ said yesterday a record high $1.3 billion services surplus and a smaller primary income deficit narrowed New Zealand’s current account deficit to $1.6 billion in the June quarter.

More economic statistics are due out this morning: the GDP figures and the monthly migration figures.

Statistics NZ said New Zealand exported a record $5.8 billion of services in the June quarter, seasonally adjusted, while importing a record $4.5 billion of services.

The increase in services exports was driven by $3.7 billion of spending by overseas travellers in New Zealand (exports of travel services): “This is the largest ever seasonally adjusted export of travel services. Part of this increase was due to the World Masters Games in April, and the British & Irish Lions Rugby tour to New Zealand in the June & September quarters.”

Overall, the seasonally adjusted goods & services balance in the June quarter was an $834 million surplus.

Stronger goods exports reduced the seasonally adjusted goods deficit for the quarter to $446 million, down from $1.1 million in the March quarter.

Statistic comparisons

  • For the year ended June 2017, New Zealand’s current account deficit was $7.5 billion (2.8% of gdp; it was 2.7% of gdp for the June 2016 year)
  • The seasonally adjusted current account balance was a $1.598 billion deficit in the June quarter ($1.187 billion smaller than the March 2017 quarter’s deficit)
  • The goods deficit decreased $677 million to reach $446 million
  • The services surplus increased $295 million to reach $1.280 billion, the highest on record
  • New Zealand’s primary income deficit decreased to $1.910 million in the June quarter, $403 million smaller than in the March 2017 quarter
  • New Zealand’s secondary income deficit increased to $522 million in the June quarter, $188 million larger than the March 2017 quarter deficit
  • The capital account balance was a deficit of $14 million for the June quarter, down from the surplus of $3 million in the March quarter
  • The financial account net inflow was $110 million for the June quarter, an increase from the revised financial account net outflow of $787 million for the March quarter
  • New Zealand’s net international liability position was $154.2 billion (57.5% of gdp) at 30 June, up from a revised $153.0 billion at 31 March but down slightly as a percentage of gdp (57.8%)
  • New Zealand’s net external debt position was $145.5 billion (54.3% of gdp) at 30 June, up from a revised net external debt position of $144.4 billion (54.6% of gdp) at 31 March
  • The outstanding reinsurance balance for the Canterbury earthquakes is $1.3 billion while the outstanding balance for the Kaikoura earthquakes is $991 million. Revisions to recognised reinsurance claims for the Canterbury & Kaikoura earthquakes are reported in the quarter when the earthquakes occurred.

Attribution: Statistics NZ release.

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Maiden flight over Shanghai portends new trade shifts

A week after being installed as US president in January, Donald Trump ordered a review of 2 aircraft purchases – fighter jets from Lockheed Martin Corp and Air Force 1 presidential aircraft.

The price of the Lockheed F-35s has dropped – probably wisely given a Bloomberg report that Mr Trump preferred a Boeing competitor – and Mr Trump appears to be getting along fine with Boeing.

Both companies fit into Mr Trump’s ‘Make America great again’ & ‘Buy American’ campaigns. Still, he & his country might like to consider a newcomer to aircraft manufacturer, at least for passenger planes: the great currency manipulator, China.

State-owned Comac (the Commercial Aircraft Corp of China Ltd) gave its C919 short-medium-range commercial trunk airliner its maiden flight over Shanghai on Friday. The plane’s all-economy-class layout has 168 seats, hybrid class 156 seats, with a single aisle. The basic version is designed to cover a range of 4075km, the enhanced version 5555km.

Comac has designed the C919 as a direct competitor for Boeing’s 737 and the European Airbus A320. The one other potential competitor, Mitsubishi Aircraft Corp of Japan, said in January it had pushed first delivery back from mid-2018 to mid-2020 for its much smaller (78- & 92-seat versions) MRJ (Mitsubishi regional jet).

I happen to think the US has been a far greater currency manipulator for far longer than China, and that it’s also been a trade bully since the time of the Boston tea party in 1773. Neither of the Asian aircraft developments had anything to do with Mr Trump in their evolution, starting well before his elevation, but the trade-pressuring president might like the price tag of the C919, put at $US50 million – under half the price of the Boeing 737 or Airbus A320.

That’s especially so if the US Federal Reserve starts to raise its funds rate, which would have an immediate, sharp impact on US Government debt.

China is also looking at African nations as buyers of its new aircraft which, in economic relationship terms, would raise the profile of the China-sponsored Brics (Brazil, Russia, India, China & South Africa). And it would naturally look to Asia for buyers.

It’s the kind of economic event that carries far greater weight than tough political talk because it offers a concrete alternative for trade, leads to more value-creating innovation & research and – whether wall builders like it or not – advances trade and spreads wealth.

It’s akin to a sister venture of the revived Silk Road across Asia to Europe and the new Maritime Silk Route, which will run around to several new Chinese-financed ports & rail links along the north-eastern African coast, portending greater international networks.

BBC, 5 May 2017: China’s first big passenger plane takes off for maiden flight
Bloomberg, 17 February 2017: How close to Trump is too close for Boeing?
Bloomberg, 27 January 2017: Trump’s Pentagon chief orders F-35 jet, Air Force 1 review
Bloomberg, 20 October 2014: Mitsubishi Aircraft unveils Japan’s first passenger jet
Comac, C919
Mitsubishi, 23 January 2017: MRJ’s latest development status

Earlier stories:
1 May 2016: Propbd economic update Sun1May16 – Rethinking boundaries, Silk Road unity
World property T2Jun15 – Stepping stones across Central Asia

Attribution: Company website, BBC, Bloomberg, Mitsubishi.

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Prime ministers vow to continue with TPP and toward single market

New Zealand & Australian prime ministers Bill English & Malcolm Turnbull confirmed in a joint statement on Friday that they’d work together to progress the TPP (Trans Pacific Partnership) agreement with other TPP members following the US withdrawal.

They also signed an agreement to better integrate Australia & New Zealand’s science, research & innovation agendas by enabling collaboration between researchers & innovative companies on both sides of the Tasman.

And they committed to continue finding ways to make it easier to operate across the transTasman market, and for the 2 countries to continue aiming for a single economic market.

Joint statement – leaders meeting 17 February 2017

Attribution: Government release.

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NZ debt position continues to worsen

New Zealand’s net international liability position has worsened in all of the last 5 quarters, rising from $149.4 billion in June 2015 to $166.2 billion (64.9% of gdp) in the September 2016 quarter. The figures out from Statistics NZ yesterday show 3 steps of about $4 billion and, in the latest quarter, another step up of $3.2 billion from a revised $163 billion (64.4% of gdp) in June.

The value of liabilities increased by $2.5 billion in the latest quarter while the value of assets decreased by $710 million.

Statistics NZ’s international statistics senior manager, Jason Attewell, said yesterday the seasonally adjusted current account deficit increased from $1.8 billion to $1.9 billion in the September quarter, a result of more spent on imports, $686 million less earned from exports, a shortfall which was funded by the banking sector.

Meat (New Zealand’s second largest export commodity) led the fall in export goods, down $235 million. Fruit exports also fell, dairy showed little change, logs & timber exports rose by $43 million.

Mr Attewell said New Zealand’s offshore investments earned less income, the main factor driving a $71 million increase in the investment income deficit, and foreign tourists spent less in New Zealand, leading to a $16 million fall in the services surplus.

The annual current account deficit was $7.5 billion (2.9% of gdp) for the September year, down from $8.5 billion (or 3.5% of gdp) for the previous 12 months.

Balance of payments and international investment position: September 2016 quarter

Attribution: Statistics NZ tables & release.

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Propbd on Q F5Feb16 – Cruise trade, Lyttelton wharf reopens

Cruise ship based in Auckland for 5 months
Lyttelton port rebuild opens

Cruise ship based in Auckland for 5 months

P&O Cruises, a division of international cruise operator Carnival Corp & plc, will base the 1800-passenger Pacific Pearl in Auckland through to 23 June.

The liner arrived yesterday with nearly 1000 Australians on board, many of them signed up for a special cruise package which included 4 nights in Auckland and access to the rugby league Nines at Eden Park.

Carnival Australia & NZ executive chair Ann Sherry, said the Pacific Pearl would go on an unparalleled 20 cruises over the next 5 months – double the number last year – generating up to $20 million in economic value for New Zealand.

The Pacific Pearl’s schedule includes 2 voyages between Auckland & Sydney. Its 18 round-trip cruises will take it to 11 New Zealand ports.

Ateed (Auckland Tourism, Events & Economic Development) chief executive Brett O’Riley said Auckland’s record cruise season was estimated to deliver $251.7 million to the region.

Lyttelton port rebuild opens

Deputy Prime Minister Bill English and Earthquake Recovery Minister Gerry Brownlee missed the excitement of shaking hands with dignitaries signing the Trans Pacific Partnership Agreement at SkyCity in Auckland yesterday, and an insight helped by TPPA protesters into what a completely pedestrianised central area might look like.

Instead, the 2 southern ministers headed to Lyttelton to open an $85 million port expansion, the Cashin Quay 2 Wharf. The rebuild of a wharf destroyed in the 2011 earthquake turned into a 10ha reclamation, using over a million tonnes of rubble from central Christchurch.

Mr Brownlee said the port lost 30% of its operational space in the 2010-11 quakes and had to repair 14ha of container terminal.

Attribution: Company & ministerial releases.

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Propbd on Q W16Dec15 – economy: Economists study Auckland housing, dairy

Bank economists delve in Auckland’s living spaces
Reserve Bank examines severity of dairy decline

Bank economists delve in Auckland’s living spaces

ASB Bank’s economists drilled into housing statistics in a report they released yesterday, highlighting the intensity to which Auckland’s housing stock is being used, and the region’s different preferences & circumstances.

The Home economics report was prepared by bank economist Kim Mundy: “In this paper we have drilled into the detailed composition of Auckland’s households. We have made some observations and discussed some of the potential reasons for the differences we have noticed. At the very least, we can conclude that Auckland’s housing stock has been used with a greater intensity than elsewhere, and that this utilisation has increased over time. The next step will be to see if we can econometrically account for some of the differences and, in doing so, gain some insights into the extent of Auckland’s housing shortage.”
First observations were that, in 2013, relative to the rest of the New Zealand Auckland had:

  • fewer empty/unoccupied houses
  • more people living in each house
  • more households with 2 or more families in one house (over half of the country’s total)
  • faster growth in the number of households with 3 or more people (especially households with more than 6 people), and
  • within Auckland, wards with lower median household income tend to have more people/house.

Link: Home economics report

Reserve Bank examines severity of dairy decline

A paper jointly published yesterday by the Reserve Bank & DairyNZ elaborates on the state of indebtedness of the dairy sector.

The paper’s authors – Ashley Dunstan, Hayden Skilling from the bank, Matthew Newman & Zach Mounsey from Dairy NZ – said: “Dairy sector debt increased from $11.3 billion to $29 billion between 2003-09 due to rapid increases in land prices, a flurry of dairy conversions and significant on-farm investment. This rise in debt left highly leveraged farmers exposed when milk & land prices fell sharply in 2009. A swift recovery in global milk prices subsequently helped to limit the degree of financial stress, although nonperforming loans increased to a peak of around 4% of sectoral debt.

“This experience has resulted in increased caution among dairy farmers and a slower rate of debt accumulation. However, debt levels remain at elevated levels of more than 300% of trend milk income. As at June 2015, dairy debt reached $37.9 billion, representing around 10% of total bank lending. Developments in the dairy sector are therefore an important consideration in assessing financial system risks.”

The authors said global dairy prices fell by more than 65% in $US terms between February 2014 & August 2015, due to increased global supply, sanctions on Russian imports and reduced Chinese demand following a build-up of inventories during the 2013-14 season. Over this period, the exchange rate depreciated, dampening the fall in $NZ terms. Dairy prices have since increased from August lows, but recent outturns have not been favourable and prices remain well below their long-term average.

“As a result of sustained lower milk prices, dairy farmers are currently facing significant cashflow pressures. Following a record 2013-14 season, Fonterra’s payout fell considerably and farmers are now expected to face consecutive sub-$5/kg of milk solids payouts. The impact of the low payouts is amplified by an increase in average break-even payouts since the 2006-07 season, reflecting increases in debt levels and a shift to more cost-intensive operating structures.

“The worst cashflow pressures are expected to emerge in the current season (2015-16), compounded by low retrospective payments from the 2014-15 season. The cashflow shortfall for the average dairy farmer is estimated to be more than $1/kgMS (based on DairyNZ forecasts of $4.15 for effective milk revenue, taking into account the latest Fonterra forecast for the headline payout).”

Despite the cashflow pressures, the authors said dairy farm land values had been supported by low interest rates and a largely positive long-term outlook for the payout. The Real Estate Institute’s dairy price index continued to grow at about 10%/year throughout the summer of 2014-15. However, land values had recently shown signs of weakening, on limited sales volumes.

“There is a risk that land values could fall if cashflow pressures persist, especially if confidence in the longer-term milk price outlook deteriorates. Downward price movements could be amplified by reduced liquidity in the farm market, if demand to purchase farms falls alongside the increased risk of rising stressed sales. The extent of financial system losses in this scenario hinges critically on how debt is distributed within the dairy sector.”

Link: Reserve Bank Bulletin

Attribution: Bank releases.

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