Michael Every ​​Rabobank – The Great Games of Global Trade – exploring shifting patterns of region

Michael Every ​​Rabobank – The Great Games of Global Trade – exploring shifting patterns of region


MICHAEL EVERY: Good
morning, everybody. It’s a great privilege
and a great pleasure to be back in this beautiful
and, as we just heard, very lucky country. Unfortunately, today I’m going
to prove two hoary, old adages. The first one, the Poms are
much gloomier than Aussies, generally. And the second one, that
if you have two economists, you have three
opinions because I’m going to be arguing that really
economics is deeply political, and politics is deeply economic. They’re both joined at the hip. And unfortunately, from a
big picture perspective, we really do have some things
to be worried about even if they don’t all play out in 2017. Now, the title of my
presentation today is “The Great Game
of Global Trade.” You’re obviously all
very, very busy farmers. I do hope at some point in your
lives you’ve had time to play these four games, and
you recognise them– solitaire, Snakes and
Ladders, Monopoly, and Risk. And I’m going to be talking
about the impact of Donald Trump on global trade. Obviously, that’s
a moving target. If he tweets anything
relevant that makes what I’m
saying irrelevant, could somebody just put their
hand up while I’m talking and let me know. Then I’ll try and change the
presentation accordingly. Right. Let’s press on. Because trade is such a
political issue and such a complex issue, I want
to take a very big picture and historical approach to
try and explain it to you. And the first
thing I want to say is that in contemporary
economics and politics, we see trade as this game– Snakes and Ladders. Now, you say, why
Snakes and Ladders? Well, because there’s
one clear rule which is comparative
advantage, which I’m sure you all basically remember
from your boring economics classes when you were younger– that we should
specialise where we have a comparative advantage. Now, some countries
can go up the ladder of comparative advantage, and
others go down the ladder. For example, Thailand,
50 years ago, obviously had a strong
agricultural base. Today, Thailand is also a
huge exporter of automobiles. So they’ve shifted up the
ladder of comparative advantage there whilst retaining
their agricultural base at the same time. Other countries
can move downwards. But if we all specialise where
we have comparative advantage, output is maximised, and
we’re all better off. So we’re all better off by
playing Snakes and Ladders. That’s how we see it. The problem is
trade, historically, if we look at the long run–
and I’m talking about thousands of years of history– has not always being
either free or fair. And if you look at
the screens here, here is another set of views on
global trade we might recognise from the past. Here are Europeans
carving up the globe in various different
ways, tentacles spreading all over the place,
European empires in Asia and around the world,
and, of course, US’s nefarious
influence everywhere. And these particular
views of trade have been around for a
very, very long time. And they are reemerging
again at the moment, as I’m sure we’re all aware. The important thing to recognise
is that what they are all trying to say, these views
in one way or another, is that they don’t like
trade the way it’s happening because it’s being
seen as monopoly. One particular country
is monopolising trade with another to the disadvantage
of the country on the receiving end of it. So we say Snakes and Ladders. The populists, or those who
are rejecting free trade, both in the past and at
the present, are saying, no, no, its Monopoly. And in fact, in some
countries, historically, this was the norm. And today you’re hearing
the same thing again. People are saying,
we’d be better off playing solitaire, basically
just trading internally as much as we can and
really just trading at the margin with
other countries rather than looking
to free trade as the answer to everything. And let me stick with
history a little bit further. Growing up in the
UK in the ’70s, I can actually remember
seeing pictures like this in my textbooks
at school to try and explain why some countries were
rich and other were poor. Does anyone remember
this vaguely? No? Yes, no? Basically that
countries started off trying to guard their
national treasure. They were trying to export
more than they imported to run that lovely
trade surplus, build up their treasure balance. And they would do that
by the mother country, or the powerful
country, exporting high value-added products to
weaker countries in what we used to call the
Third World, who would sell them raw materials
back generally at low prices. This is still actually
banging around as a theory in some
political circles today. We will come back to it later. Now, I want to look
at a long run again of historical
development of free trade here because the actual
idea of free trade was first developed around
1817 by David Ricardo, for those who have read
their economic history. And it only really
kicked in in the UK in 1846, about 30 years
later after the Corn Laws were repealed, of course. So the UK could import
corn from Europe and focus on specialising in
industrialisation because we were the first country
to industrialise. Now, initially, if you see
there from the picture, in 1846, everyone says, great, let’s
play Snakes and Ladders. The UK specialises in industry. Europe specialises in
growing food to feed the UK. And that lasted
quite a few decades. Everyone copied it
across Europe and said, this is a really, really
powerful economic theory. We’re all getting better off. The problem is, if you
look, after 1873 we started to have a global
or a European depression largely because
we had oversupply. Agricultural products were
flooding out of the US, depressing prices in Europe. And all of Europeans
were looking around at the UK, which was
dominating the global economy and dominating the global
politics and basically said, how come we haven’t got a strong
industrial base like them, and we’re only growing
food to feed them? And they actually
started to argue this was a trick in encouraging
them to specialise in growing low value-added food rather
than high value-added industrial products. And one by one,
European countries started to move back to
playing Monopoly, trying to protect trade, trying to
develop industry behind tariff barriers and then finding
other countries to grow food to sell to them. This is historical fact, even
if it’s a bit uncomfortable and not generally brought
up in economics textbooks. Now, the problem is
if you have everybody trying to play Monopoly at the
same time, it doesn’t work. You actually play a different
game, and that game is Risk. And for those of you
who haven’t played Risk, basically it’s a
board game where you try to conquer the world. And lo and behold, those
political pressures, as they built up, are exactly
what led us incrementally towards World War I. And
free trade, of course, completely disappeared
into World War I and then came back
again in between, collapsed again in World War II. Now, at the moment, we’re
all shocked, shocked, horrified by the protectionism
that’s reemerging in the US under Donald Trump. Obviously, it’s pretty
outrageous some of the things he is saying. If we’re looking
at history again, the interesting thing is the
US was firmly protectionist– and I mean really,
firmly protectionist– all the way until
after World War II. Here, I’ve got a list of
different US presidents. I don’t know if
you can see them. Hopefully you can. But here’s some fantastic
quotes that they’ve all come up with over the years. I’m just going to
run through them all. I’m not going to read them out. But just take your
time and absorb them. My personal highlights
are Abraham Lincoln, “Give us a protective
tariff, and we’ll be the greatest
nation on Earth.” Or “Thank God, I’m
not a free trader.” Very Trumpian, all of them. So you can see actually the US
was very, very much in the camp that I’m describing here now
of trying to protect trade, trying to export
as much as possible and import as little
as possible to become the world-dominating
economy that it is today. It’s exactly the same
technique, of course, that many Asian
countries have used. And I’ll come back
to that in a moment. Now, that only changed
after World War II when there were no competitors,
when there was only really the US. And at that point,
everything changed. And we entered the world
that we understand today but that I would
argue is actually starting to come to an end. Now, the world was different
after World War II, economically and
politically, because we shifted to a world in which
the US dollar was key. The commodities that you all
sell are priced in US dollars. Global trade is carried
out in US dollars. Internationally, everyone
thinks primarily in US dollars. Now, how did we
get to that stage? We got to that stage because
everyone could get US dollars by selling to the US. If you wanted to get
dollars, it was easy. You just sold something
to the US, which was now open for the first time. Trade was no longer
a zero-sum game as it used to be in the past
when we had to try and get gold off of other people, or silver. You could get dollars
very, very easily– very important point. The problem is Donald
Trump is now showing us that the US appears
to be moving back to the pre-World War II pattern
of thinking about trade. Now, Trump is only one
man, but I put it to you– unpopular as he may
be in many circles– is there really a
constituency in the US that in the election
coming up soon could say, let’s go back to
completely free trade. Let’s ignore everything
that Trump has just said. Clearly, it is
wonderful if we keep importing more and more
and more from other people and don’t export to them. I would argue no. I don’t see that’s a
realistic political position within the US at the moment. And if we look at the
size of the US trade deficit on the left there
and the two countries that are primarily driving it,
which is China in blue and Mexico in
orange, you can see why Trump is bashing those
two countries in particular because there’s nothing
wrong with the trade deficit if you’re importing
capital goods. If you’re an emerging market
importing capital goods to invest because
you’re short of them, that’s basically like
investing in your own education for the future. It is going to pay off. If you’re importing consumer
goods, every dollar you spend is a dollar you could
be spending at home. Now, it may sound controversial,
but in certain circumstances, Trump is correct. Or his advisers are correct. Trade deficits can
reduce employment, and they can reduce income. And even if he is saying it in
a very angry, inarticulate way, there is some logic to
what Trump is saying. And I don’t think
politically it is going to be very easy for people
to push back against that. So really, when will we see this
big shift towards protectionism in the US, because it
hasn’t happened yet. We’ve only had rhetoric. I don’t think it’s an “if.” Let’s look at what the
guys around Trump and Trump himself are saying. We’ve had Wilbur Ross,
the commerce secretary, saying there’s trade,
there’s sensible trade, and there’s dumb trade. And we’re going to
stop doing dumb trade. I would say they think dumb
trade is that, frankly, they just keep buying and
don’t sell very much. And Trump himself
is a businessman. Let’s not forget that. And businessmen
think very logically. If you buy more than you
sell, you go bankrupt. No business can
operate on that basis. Clearly, he thinks the US
should operate like a business. It should be selling
more than it buys. Or at least, it’s trade
should be balanced. And, of course, his
advisers say the same thing. His policy adviser,
Steve Bannon, has openly called himself
an economic nationalist. Openly, in several interviews. Peter Navarro, who’s
guiding Trump on trade, has written a book
called Death by China. If you Google it, you can
watch it as a movie on YouTube. It’s actually
surprisingly good viewing. And his US trade representative
nominee, Lighthizer, wrote a very, very
comprehensive paper back in 2010 that argues
the US should unilaterally derogate China’s WTO membership
because it cheats on the WTO terms so much. Unilaterally, they
should just say, China, we don’t consider
you’re in the WTO. So these are the
guys around him, and yet, we still have people
saying Trump doesn’t mean it. I find that very unlikely. Trump’s also saying, I want
to leverage the vast US market to do bilateral trade deals. Yep, we’ll buy from you if you
buy from us in equal amounts. That is exactly what China does. So we’re going to see a
shift where the US starts doing China-style trade. And that does represent
an absolute leap forward or backwards, depending
on how you look at it, in our entire global paradigm. Because here’s the Risk board,
beautifully laid out for us. And if the US does step back
like those arrows just did, everything starts to change for
all of us globally over time. For example, here
you can see the TPP. Now, I made myself
particularly unpopular– I’m usually unpopular, but
I was particularly unpopular when I came down to see
clients around 18 months ago, and I said the TPP will die. I don’t understand
why everyone’s getting so excited about it. And that dog will not hunt. The US is going to kill it. They came up with it. There’s no political
wind behind it. It’s going to die. Well, it has. It has crawled
off, unfortunately. So it has exited, stage left. And what we’re all
talking about now– in Australia very much so from
what I read in the press– is a new China-centric
Regional Comprehensive Economic Partnership, the RCEP,
which always makes me think about Aretha Franklin. Here, you can see all the blue
countries clustered together. Now, it looks
wonderful, doesn’t it? It does look wonderful. They really cluster very nicely. The problem is, let me tell you
now, it’s not going to work– not going to work
at all because when you look at a regional
grouping, you’re presuming that it can start
to work the way the EU does, where you have a lot of
intra-regional trade, and extra-regional
trade is at the margin. Well, have a look at the trade
balances of all the countries in the RCEP. And again, I want to sing some
Aretha Franklin every time I say that. You’ve got surpluses
and deficits. Can you see who’s running the
enormous surplus there in blue? Any guesses who that is? It’s not Australia. It’s China. Everybody else is running small
surpluses or small deficits. There is nobody in
that grouping who is running a deficit big
enough to absorb everything China sells. Nobody. It will not balance
out as a group. It may trade more between
themselves a little bit, but you’re still going to
be looking at other people to be buying the end product. And the US is
saying, not us, mate. And Europe is
looking more and more like it’s going to say,
not us, mate, either. So really, that
worries me a lot. It’s not going to balance out. Who’s going to absorb that
huge surplus from China? Now, China’s actually got
bigger appetite than that. It’s talking about the One
Belt-One Road or the new Silk Road project. And here are all the
countries that China is talking about building
infrastructure to or through to link itself to the
rest of the world. Now, that works. In fact, if you’re
playing Risk– I don’t know if anyone
ever did in their youth– if you play Risk and you get
all those countries, you’ve won. Fantastic. That’s a really great
grouping of countries. And if you look at what
everyone produces or has and offers within that
grouping, that can really work. You’ve got high technology. You’ve got cheap labour. You’ve got consumers. You’ve got fantastic military
in there as well, quite frankly. It really is a very,
very powerful grouping that could mean America can
exit stage left and just go and trade pretty much
with Canada and nobody else. Fine, you’re on your own. No worries. Unfortunately, that’s
not going to work either. You can see why I’m unpopular. The reason is what
currency are they going to use to trade together? We live in a
dollar-denominated economy. I hope I’ve made
that clear already. What you can see here on this
chart, this technicolour chart, is the share of global
banking transactions– that’s SWIFT
transactions into bank– done in different currencies. The orange ones
are in the dollar, and the blue ones
are in the euro. Now, the blue ones we can pretty
much take out– the dark blue. They’re not going to apply to
most of that One Belt-One Road. They’re just within
the eurozone itself. So look at the orange
compared everything else for the rest of the world. And in particular, look at the
little red slice at the top. That’s the renminbi. It’s irrelevant,
absolutely irrelevant. We hear lots about China
trying to internationalise its currency when it’s actually
reversing at the moment. Of the last 12 months,
offshore holdings of renminbi have dropped significantly
after all the interference that China’s made in
the financial markets. So how are you going to
trade within that block if there are fewer and fewer US
dollars available because this is the key point
I’m getting across. If the US doesn’t run
a big trade deficit, where do the dollars come from? How do you get dollars? How does country
A have the dollars to trade with country
B within that block because dollars will
become like gold. They’ll be the fixed
stock that we have now, and when they’re
gone, they’re gone. So global trade will really
start to get very gummed up, and financial markets will
get extremely volatile if we move in that direction. It’s something far too
many commentators don’t understand, unfortunately. So just to try and
reiterate again– our paradigm really
is, at the moment, similar to a picture I remember
seeing on The Simpsons years ago that the food chain being
taught in Bart’s school, which is basically everything
going into the human mouth. This is pretty much our
global economic food chain. Everybody exports to
the US, more or less. And they do that because
that’s the centrepiece of our post-World
War II architecture. The US sends out dollars. It buys from everybody else. Now, that worked
really, really well when the US was this big and
the global economy was that big. But as everybody else
develops and the US basically grows more slowly than
China, for example, the ratio gets all out of whack, and the
US can’t run a big enough trade deficit to keep supplying all
the dollars everybody needs. We’re already seeing that. Japan was a warning
in the ’80s and ’90s. China really is the
harbinger of doom for that particular paradigm. It can’t work. But if we don’t stick
with that paradigm, if we move to a paradigm
where the dollar no longer is the global trading
currency and nobody knows which currency to
use anymore, well, we go back to the 19th
century in many ways. We start going back
to trade in blocks. And people start thinking
who’s in my block? Who can I trade with? Who’s got things I want? Who can I sell to? Who can I run a trade surplus
with to get hold of a currency that I want? All the political tensions
come flooding back that we saw in the 19th century
and the early 20th century. Pretty worrying. Yeah, I’m a gloomy Pom. But unfortunately, that’s what
history seems to be showing us. So if we look at China
and One Belt-One Road, which Australia
wants to be part of, this could rewrite the global
economic map forever, folks. It absolutely could. It absolutely could, in theory. Or, it could see China
basically throwing away trillions in
infrastructure investments across countries that end up
electing their own version of Donald Trump in the future. And we’ve already seen
these headlines recently in the press talking about
China’s debt diplomacy where, yeah, they’ll lend you
money to build infrastructure that suits them very nicely. Thank you very much. And then after that,
you’re in hoc to China. And of course, you
also have the problem that if China builds all that
infrastructure across the One Belt-One Road just to flood
everybody else with product, the same way that it does the
US, all you’re going to see is a backlash. One by one, other
countries are going to say, why don’t we have
industry anymore? We used to. And you’ll get exactly
the same pushback that you’re seeing in
the US just in time. Now, let’s look at the data
to see if I’m talking twaddle, or this actually
makes any sense. If we look here within parts
of One Belt-One Road, what I’m showing you
here is the ratio of exports to imports
between China and ASEAN, so Southeast Asia. And I’m showing it for various
different products segments, from primary
commodities in orange, right way down to high
tech or high skill. Can you see them over there? If we are in green,
China runs a surplus. And if we’re in red,
China runs a deficit. Now, if you look at the trend
over time, what you can really clearly see is with the
rest of the Asian region, China buys commodities and
raw materials and food. And everything else,
China basically sells back, more
and more and more. It’s running a larger
and larger surplus. So in other words, relatively
low value-added stuff goes in, primary commodities,
and high value-added products go out the other end. Well, doesn’t that look
very, very similar to that? And I can assure you within
Asia below the political level, I have this conversation with
clients across the region, and they all nod and say,
yep, we can see this. We can see this One Belt-One
Road looks very, very, very similar to this. And here is a wonderful headline
from the South China Morning Post that came out
just a few weeks ago. I had to insert because the
politicians don’t like seeing it, but it’s pretty clear– “Why Talk of a Chinese-Led
Free-trade Bloc is Ill-conceived Fantasy.” So China recently was
at Davos, and Xi Jinping talking about globalisation,
talking about free trade. Wonderful sentiment. Let’s see China actually
start running a trade deficit. Let’s see China actually
acting like the US and saying, whatever you provide,
we’ll buy it. We will be the glue that
holds the block together. They don’t. They want to sell, not buy. Now, I admit, here, you’re
a very lucky country because they want to buy the
food products that you make. So you are a very
lucky exception to this rule in general. But you have to be
cognizant of how volatile that global backdrop is. So putting it together and
thinking about these games again, if the US steps back
and starts to play solitaire, and politically that’s
what we’re starting to see, then really the dollar is
going to go up, up, up, and up. That’s the US dollar. And global trade is
really going to come under stress and strain. And we’ll move from playing
Snakes and Ladders to countries saying, hey, the only way I
can get ahead now is Monopoly. And if too many countries
start to play Monopoly at the same time,
well, then we’re all going to go back and
start playing Risk, which is where things start
to get pretty worrying. And so to put it in
a broader context, this may not apply to 2017. I may be exceeding
my remit here, and I’m going to
be dragged offstage and beaten up in a moment. But everything now is
looking happy for Australia. I agree, right now. But what happens if at some
point in the near future you have to choose between
a Western framework and being a member
of One Belt-One Road? One way or another. Because on one hand, you’ve
got a third of your exports. You’ve got a flood of students. And of course, you’ve
the housing market, which is, oh, so
important, being propped up by a constant flow of
Chinese money coming in. And on the other hand,
you’ve got cultural links, a few exports, and
you’ve got defence. You’ve got a US
defence umbrella, which obviously is a bit of a
controversial thing to throw in at the end of an agricultural
conference, but, you know, let’s be realists here. Because at the moment, really,
I’m talking about games. There’s a giant game
being played out, and it’s above all of our heads. And its poker, very high stakes
poker between the US and China. And previously, it
was the Obama regime, and many people would argue
that Obama lost his shirt. Trump certainly
thinks that’s true. But at the moment, the Joker
in the pack for all of us is Trump. So let’s wait and see what
tweet comes through and when, determining what this global
framework is going to look like and how we all
operate within it. But pretty simply, just
to try and bring it down to basic tacks
at the end of the day, the rules of global trade for
all of us are going to remain. First of all, demand. Do people want to
buy your product? And the answer is yes. Everybody loves what you guys
grow, which is fantastic. Then you’ve got
logistics or supply. Can it get to them
in a condition where they want to eat it? A different topic
I’m sure you’ll be talking about over
the next couple of days. But what I’m flagging
here is the dirty word that most economists
don’t want to talk about– politics. Are people going to be
allowed to eat it at all? And I do think they will
be in Australia’s case. But I do think there is a huge
amount of volatility locked away into our current
paradigm which is going to erupt at some point. One tweet will come through,
and all hell will break loose in the markets. Have a nice day. Thank you very much.

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