Monday, July 18, 2016

Economic Threats From China Expose Lie Of Free Trade

A little more than a decade ago, various parties boldly declared that the economic future of New Zealand lay in being some form of colossal, country-sized milking shed (and, to be fair, milk powder processing plant) for the People's Republic of China. To that end, we signed up to a rather lopsided Free Trade Deal with China which forced us to abandon any pretense of mercantilism or dirigisme for our own domestic economic interests - while at the same time giving the Chinese literally decades to slightly soften and ameliorate their own protectionist economic measures.

It was a great deal.

For the Chinese, at any rate.

But what about little old New Zealand?

Certainly, a large portion of our primary produce exports are bound for the Chinese market; although it has not escaped the attention of many that in that direction, too, go commanding stakes in the ownership of a certain swathe of Auckland's housing - and a not insignificant number of our best and most iconic farms.

Concerns about 'free trade' and associated legalistic ensnarements have been cited in both instances as justification by the Government to refrain from doing anything meaningful about either.

But where leaving serious matters of state up to the limp-wristed hand of the free market might do for the New Zealand National Party ... the same cannot be said for our supposed friends in Beijing.

In reaction and response to news that the New Zealand Government has gotten a bit uneasy about decidedly sub-standard Chinese steel being put into our own domestic infrastructure projects (and accompanied by fraudulent safety standard certification, no less), the PRC is apparently considering raising punitive "reprisal tariffs" on Kiwi primary produce exports in order to force our government to move to protect Chinese interests rather than our own.

As yourself. Just what kind of "Free Trade Deal" is this when one party can act to unilaterally put the economic screws upon the smaller, weaker party for expressly and avowedly political purposes.

What's the point of a bit of paper stating our commitment to abolish tariffs on Chinese imports if, when push comes to shove, our nominal trade "partner" sees fit on a whim to massively increase their own tariffs on our exports to there.

And worse, it now appears that the PRC was able to illicitly gain Ministry of Business, Innovation and Employment information about New Zealand's prospective inquiry into this matter.

These tropes, all put together, are not the hallmarks of a healthy, bilateral and egalitarian trading relationship.

Instead, considered as part of a holistic plot, they put one in the mind of a noir Mafia film. Everything from the sub-standard product sold to us without regard for the potential human consequences through to the threats if we raise a fuss fits this rubric. ESPECIALLY the part of the story where going to law enforcement fails because the folk running this evident economic extortion racket appear to have a man or men on the inside passing them information, and pushing pointed punitive measures against those we care about in response.

And as the morally innocuous 'straight man' protagonist of a certain variety of Mafia movie, we now find ourselves having stepped into a murky world where the promises of power, influence and 'get rich quick' are underscored and bellied by that most uncomfortable fact - that we are now in a place and in an arrangement where we most decidedly do NOT make the rules, and find instead find ourselves the unwitting subjects of a seriously Faustian (at best) bargain.

Perhaps the only truly 'winning' move of this game would have been not to play.

But it's a bit late for that.

And given the extent to which our economies are presently entwined, the sage advice of the ancient German proverb that when one sups with the Devil, one ought remember to use a long-handled spoon is plainly no longer applicable.

There are no easy ways out of this situation, in the short term at least. We will likely not win a substantive trade war with China. They simply comprise too much of our market (and us, too little of theirs) for 'victory' (whatever that might look like) to even be contemplated. Throwing the combined powers of the WTO or something at them would also be a move of questionable efficacy, as the Obama Administration has previously discovered to its irritation when it sought to do similar over the issue of the PRC's artificially undervalued currency.

At best, there are longer term insights to be drawn from this in a potential bid to prevent a deleterious repeat from occurring.

First and foremost that export-lead growth as an enduring strategy is best pursued with a number of different 'large basket' trade partners simultaneously. Winston has already made the case for opening up greater trade relations with, for instance, the Russian Federation as a means and a mechanism to broaden our trade portfolio and remove some of the eggs of risk from the present, excessively overburdened Chinese basket of exchange.

Second, that we would do well and wisely to learn the lesson obliquely presented here about the sheer folly of hoping that the happy-clappy good-will of New Zealand to such countries as we may enter into world-first trade deals with are necessarily shared by our erstwhile 'partners'. International relations and especially transnational economic flows are a cut-throat, realpolitik driven business. States look out and after their own interests - nobody else views themselves as owing us a living, and we should perhaps come to expect this sort of slipshod perfidious conduct from those we do business with.

Third, the benefits and likely outcomes of trade deals are almost always oversold. And the political Cassandras who cast doubtful aspersions are mocked and derided for their foresight. Nobody generally wants to be straight-up and honest about the plain (if somewhat occluded) reality that the trade deal they've just negotiated contains nasty stings of this nature hidden in the tail.

And fourth, this whole mess eventuated princely and primarily because New Zealand entities made the curious decision to source cheap and sub-standard Chinese steel rather than buying from more local producers with a superior proven track-record of quality.

One obvious mechanism by which we might avoid similar situations from occurring in the future, then, is to mandate that where possible materials procured for domestic infrastructure projects ought, where possible, be sourced from local producers rather than offshore. Obviously, this will not be possible in every instance, and there will be clear occasions upon which materials from other nations will be both cheaper and better quality than that which we can produce here at home. But the net positive impacts upon domestic employment and industry from mandating that Kiwi government objectives be carried out primarily by Kiwi firms using Kiwi materials are palpable.

So palpable, in fact, that New Zealand First's Andrew Williams put a Private Member's Bill in the ballot about four years ago in order to accomplish exactly that.

In conclusion, then, it is perhaps possible to view what's eventuated as being something of an inevitable crisis. Given China's reputation for corrupt practices and shoddy, el-cheapo exports, it was arguably only a matter of time before something akin to the Melamine milk crisis would re-eventuate here on our own shores.

Fortunately, no lives have been lost here - and the deficiencies in some of the steel which was used to construct part of the Waikato Expressway were detected in sufficient time to alter designs for some bridges and source other replacement steel before the rest of it was used.

But this is not going to be the last time something like this happens.

We can but hope that future governments learn the appropriate lessons from this sad series of incidences.

To do otherwise would make a waste of decidedly more than just steel.

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