All the Better to Eat You with

Gareth MorganEconomics


The arrogance of the US authorities in matters of trade has been to the fore in recent weeks. The country that has recognised free trade as good for all is now of the opinion that it is good for everybody except itself.

Interest in the matter here was sparked by a ruling made in the US on February 11. The US International Trade Commission decided that cheap imports of lamb from New Zealand and Australia were a threat to the livelihoods of US producers. The judgement cleared the way for the imposition of higher tariffs and reduced quotas, both of which are clearly detrimental to Kiwi exporters.

The US slant on the trade issue is that US consumers have acted as the export market of last resort for troubled "developing" economies for some time now, effectively doing them a favour by continuing to purchase their goods. But, officials argue, there are limits to the generosity that even this benevolent uncle of a country can extend.

In the words of Treasury Secretary Robert Rubin: "The international system cannot sustain indefinitely the large trade imbalances created by disparities in growth and openness between the US and its major trading partners."

Mr. Rubin is correct. The US balance of payments deficit is now approaching 3% of GDP and getting worse. But the need for any sort of trade intervention to fix the problem is debatable. The market could simply be left to decide for itself when the deficit is too large, at which point American dollars would be sold off, the currency's value would fall and the deficit would shrink of its own accord. This was exactly the sequence of events that occurred last time the US was running a big trade deficit in the 1980s.

Recently too, the US has shown faith in the market's ability to fix deficits unaided. It stood by as balance of payments deficits grew in New Zealand, Australia and many Asian countries and then watched as exchange rates tumbled to correct this. The US simply stood by and waited for the market to decide when enough was enough. There was no braying about the "stability of the international system".

Now it is the turn of the US to bear some of the costs of adjustment, but it is unwilling to accept the reduction in living standards that goes along with those costs. Ironic perhaps, since it was quite happy to see others bite the bullet just two years ago! Instead, protectionist influences in the US are looking for other ways to control the trade deficit.

These include underhand tactics – tariffs, quotas and sanctions. While the US was running a trade surplus, it was quite happy to argue for the removal of such restrictions, with the justification that free trade is good for all. Those arguments can now be seen for what they really were – pure self-interest.

New Zealand's problem is obvious. Retaliatory trade sanctions will have virtually no effect on the United States, but plenty on New Zealand. Exports play only a minor role in the US because of its huge domestic market, while we are far more reliant on them. The benevolent uncle has turned nasty, and oh what big teeth he has.


All the Better to Eat You with was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.