The critical importance of trade
Colin James's column for the Otago Daily Times for 17 February 2009
John Key last week rejected the Greens call for a three-year freeze on MPs' salaries because the anecdotal evidence he is getting suggests the recession will not go beyond this year. So they settled on one year.
But were the Greens right? There is some reason to think they were.
Jobs are disappearing fast in the big rich economies. International trade slowed abruptly in the December quarter and is expected to contract through this year. And trade is jobs. The International Labour Organisation says 50 million could go worldwide by end-2009.
For a while last year, as the United States unwound its housing boom and the sleight-of-hand mortgages which put people into houses they couldn't afford unravelled, exports kept its economy out of recession.
But the credit crunch eventually caught up with over-borrowed consumers in Europe. Housing booms in Ireland, Spain, Holland and Britain and elsewhere burst. Broke consumers can afford fewer imports.
So unlike Japan at the end of its long post-1990 recession and the east Asian economies after their 1997-98 crisis, the United States can't rely on exports. It has to haul itself out of its recession. (Same here for some time ahead because exports, including tourism, are not going to offset the unwinding of our own housing boom.)
A complication: United States households used to save on average about 7 per cent of their disposable income. In the boom borrowing years they saved close to zero. In December they had got back to 3.6 per cent. They will need to go higher to repair their tattered balance sheets. (Same here, from an even worse record.)
So consumers can't pull the United States out of its recession.
It's up to the government. And the government has to borrow. That means future consumers will pay higher interest rates and taxes than otherwise they would have been paying.
The same applies in varying degrees in Europe, notably Britain and Ireland and the new eastern member-countries. The party is over and the hangover promises to be long. Unemployment rates of 10 per cent or more are projected across the continent. The eurozone economies contracted 1.5 per cent in December.
Asia is joining the hangover. Japan's economy has dived back into recession. Exports from Japan, Korea, Taiwan and China have dived and growth rates are slowing. India is farewelling hopes of double-digit growth. An exception, judging by an upbeat presentation by our four ambassadors to Latin America last week, might be some South American economies.
In the developing and least-developed economies around 70 million are expected this year to slip back into poverty. That includes poor oil states. The Economist Intelligence Unit projects a two-fifths fall in commodity prices this year from 2008. Australia is feeling that.
While the economic models project a recovery in 2010 (or sometime), there is no assurance the models' mathematics will trump consumers' and businesses' psychology. Big financial busts have big real-economy consequences, as Niall Ferguson shows in The Ascent of Money. And this is a very big financial bust. By some reckonings, America's banks are insolvent.
So the Greens may be more right than Key. This may be depression, not recession. Governments do have levers but they may simply not be long enough.
It is against this backdrop that Trade Minister Tim Groser announced last week that free trade talks are on again with Hong Kong. He is off to India to talk over a trade deal, which he catalysed while in opposition. He has high hopes from the recently sealed CER-ASEAN pact, which he rates as high-quality.
And next month talks are due to begin on extending the P4 free trade group (Brunei, Chile, New Zealand and Singapore) to include the Australia, Peru and the United States, with Vietnam keeping a close watching brief against the possibility of joining. P4+ is potentially a backdoor route to the now forlorn APEC objective of an Asia-Pacific free trade zone.
All good -- provided governments don't get too protective. This has two elements.
One is at the international level. The Doha round, aimed at liberalising trade, is lifeless.
There is a parallel of sorts in the climate change talks, which are supposed to reach a post-Kyoto-protocol deal by late this year. The prospects aren't good -- at best it looks likely to be next year. But even if there is agreement then, it is likely to leave a lot of wriggle room for governments under pressure not to impose economic costs on recession-hit populations.
That is the second level: politicians reaching for protective cover for their constituents. The European Union has moved to reintroduce dairy export subsidies. The United States fiscal stimulus legislation includes "buy American" provisions. Calls for tight financial regulation could spread to regulation generally.
If that is where the rich world heads, Key and the Greens might be freezing MPs' salaries for quite some time. Groser's trade deals work is vital -- for jobs.