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>Asia-Pacific Integration: The Economic and Security Dimensions for New Zealand NZIIA Seminar: Wednesday, 13 November 2013 [1]

 

Keywords: Globalisation & Trade;

 

My theme today is on the impact of economic integration on global security. The thesis may be illustrated by the French political economist and diplomat, Jean Monnet who should have been awarded a Nobel Prize.[2] He played a key role in the establishment of the European Coal and Steel Community the precursor of today’s European Union. He pursued it because he saw that if France and Germany had an integrated coal and steel industry, they would not be able to fight one another. There has since been no devastating war in Europe comparable to the two great ones in the 60 years before the ECSC was founded.

 

Only certain sorts of integration work like this. When Britain and Germany went to war in 1914– with others – their financial systems were highly interdependent. British banks owed loans to German banks which in turn owed loans to other British ones. What the British Treasury did – Keynes was involved – was transfer the German debts to British banks, offsetting the British loans to Germany.

 

No, the sort of integration I am concerned with today is where products cross international borders and the economies become entangled as a result. Germany could not fight France if its arsenal depended on French production and conversely for France. Even a Keynes could not magic away that interdependence if the borders froze.

 

What has been happening after the Second World War is a major transformation in international trade. It has various aspects, like intra-industry trade when Germans purchase French assembled cars and the French purchase German assembled ones.

 

Another key phenomenon is value chaining in which assembly in one country uses components made elsewhere. At one stage a Honda assembled in America had more American content than did a Ford. Similarly, your jacket with a label ‘made in China’, where it was assembled, may contain components – material, threads, buttons, zips – which came from other (typically South East Asian) countries. We saw this when the tsunami which hit Japan closed down factories elsewhere because their components plants were devastated.

 

This is not the sort of international trade which is described by comparative advantage. We New Zealanders, immersed in the 200 year-old theory, need to be confronted by comparative advantage is no longer a comprehensive account of international trade. Some, of course, is absolute advantage – like oil from the Middle East. But the more recent form is sometimes described as ‘competitive advantage’. It requires thinking about international trade in quite a different way.

 

Some background before I review the limitations in our thinking. About 30 years ago, economists became increasingly aware that international trade was no longer driven only by absolute and comparative advantage. Particularly important were the insights of Paul Krugman for which he received an economics prize in honour of Alfred Nobel in 2008. I wrote a book Globalisation and the Wealth of Nations about it in 2006.

 

Some recent research illustrates this increasing complexity. Where do we get our merchandise imports from? Usually we report imports by gross value. The pecking order for 2009 is given in the following table.

 

New Zealand Imports: 2009

Gross Imports		Value Added Imports
Economy	Share (%)	Economy	Share (%)
Australia	18.4	EU27	25.2
EU27	17.3	US	15.5
China	15.1	Australia	15.1
ASEAN	13.1	China	9.6
US	10.8	Japan	7.4
Japan	7.4	ASEAN	7.3
Other	17.9	Other	19.9

Source: Statistics NZ &http://stats.oecd.org/Index.aspx?DataSetCode=TIVA_OECD_WTO

 

The first two columns, which shows gross imports by source, will be familiar. Australia is our biggest source of gross imports. I’ve combined all the EU into a single economy – reflecting the economic reality – it comes second. Then China, ASEAN – which is not as integrated as the EU but may be moving in that direction, the US and Japan. Between them, the big six provide New Zealand with 82 percent of its imports.

 

The third and fourth columns show the import source by where the value was added. Thus if a product is assembled in Australia from components made in the EU, the measure attributes the import to each country in proportion to the activity involved in each.

 

The biggest source is now the EU – a quarter of our merchandise exports by value are made there. It is followed by the US, Australia, China, Japan and then ASEAN. The same big six, and still contributing much the same proportion – 80 percent – to our imports. But the rankings are different. The contributions from the sophisticated EU and the US rise, Japan holds its own, and the other three fall.

 

The three whose share is lowered are at the end of the value chain, assembling from components produced in other economies. As far as we are concerned, value chaining is much more important in our part of the world, although both the EU and the US have considerable internal value chaining between members and states.

 

I am not going to do the same thing for merchandise exports. Instead I am going to look at h0w much of gross exports are made in the exporting country. A tabulation of 56 countries shows the ratio of domestic content to gross exports ranging from 97 percent value added for oil exporter Saudi Arabia to 41 percent for Luxembourg.[3]

 

Size matters: the ratio of value added to gross exports for the US and EU were 88 and 86 percent respectively. Not surprisingly the ratio for each EU economy is below its aggregate, ranging from 83 percent for Britain – large and physically isolated from the continent – down to half that for Luxembourg – small surrounded by others with similar industrial structures. The French and German ratios are 75 and 73 percent respectively.

 

There is no aggregate for ASEAN. Of the eight for which there are estimates, resource exporters Brunei and Indonesia are high (89 and 86 percent), five are in the range of 66 to 61 percent – close to the 68 percent average – and entrepôt Singapore is at 50 percent, lowest except for Luxembourg. Despite its size, China is 67 percent. Asia is heavily into value chain exporting.

 

Given it is isolated and a resource exporter of food and fibre you would expect New Zealand to have a high ratio, even though it is small. It is 13th out of the 56 with an average of 82 percent, immediately below Britain and well above the average. Australia is higher at 87 percent because of its mineral exports which, of course, are not exported to New Zealand; we get their value chain exports.

 

This data is only recent, but it emphasises that there are complicated things going on in international trade, and I have not even touched upon international trade in services. Before moving on to the profound security implications, let me add some pointers for New Zealand.

 

The first is that we need to break away from thinking that international trade is only about comparative advantage. We need to build into the national thinking the growing complexity and not be trapped by outdated thinking.

 

A particular example is the government has a goal to lift our exports to 40 per cent of GDP by 2025. (The current level is about 30 per cent.) I understand the figure was selected on the basis of comparing other economies similar to ours. But it was a crude comparison, and did not recognise our insolation nor role as a resource supplier. I doubt New Zealand is going to soon get into the middle of many value added production chains – we are not Luxembourg.

 

Third, but briefly, we have to pay more attention to the European Union because of the major role it plays in a source of our imports.

 

A final point is that perhaps we need to rethink our strategy for international trade in foodstuffs. Have we exhausted the gains from pursuing the case for comparative advantage – even though it remains true? Here’s an off the wall suggestion. The notion that a country’s food security can be based on self-sufficiency is very wrong – ask a nineteenth century Irish potato farmer. My guess is that a system in which there is free trade in foodstuffs with prudent provision for stocks and international arrangements for sharing in times of stress will provide far greater security.

 

Which leads on to the issue of general security and economic integration. We observe the tangle of the noodle bowl of free trade agreements. They reflect the greater entangling of international trade, an entangling which is making a prolonged great war increasingly unrealistic. There are some exceptions.

 

First, a quick conflict may be possible – not only sabre rattling but the occasional sabre slashing. But not for long. Sufficiently entangled economies will come to a limping halt through the automatic trade sanctions with entangled producers on either side of the border desperate for peace so they can resume obtaining necessary components.

 

This is not to argue that the international economic entanglement will contribute much to ending terrorism for terrorists are not particularly involved in international trade. Nor does it deal with isolated countries. The ideal of getting North Korea involved in international economic intercourse contradicts the strategy of isolating it through sanctions.

 

Thus I welcome India and Pakistan opening up economically towards one another. The steps are tentative but they are under way. Similarly I am glad to see India and China increasing their economic intercourse. It is probably not enough yet to prevent armed conflict, but again it is in a positive direction.

 

What is New Zealand to do about this? Our location in the international economy is more traditional but that does not mean everyone else’s is. Even if we cannot get as involved as they do, we should certainly encourage economic entanglement. To be fair, our strategy towards international economic relations is very compatible with such an approach.

 

A final summarising thought. I opened by saying that Jean Monnet should have been awarded a peace prize. There is a sense in which he was – implicitly and posthumously. Only last year – sixty years after the formation of the European Coal and Steel Community – the European Union was awarded the Nobel peace prize for ‘for [having] over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe.’

 

Sixty years of peace in Europe after two terrible wars in the previous sixty years should be celebrated. It has been a long haul. The next sixty years of such peace in the Asia-Pacific region would be worth a celebration too. Economic entanglements are making their contribution to that possibility.

 

Appendix Table: Percent Domestic Content of Exports (Selected Economies)

(Number gives ranking out of 56)

ASIA		European Union		Other
				1. Saudi Arabia	97
5. Brunei	89			4. United States	89
				7. Australia	88
8. Indonesia	86	.EU27	86
9. Japan	85
		12. Britain	83
				13. New Zealand 14. Chile	82
				15. Canada	80
19. India	78
		22. France	75
		26. Germany	73
27. Hong Kong	72
34. China	67
38. Cambodia	66
40. Thailand
45. Viet Nam	64
47. Malaysia 48. Philippines	62
51. Korea	59
52. Taiwan
55. Singapore	50
		56 Luxembourg	41

Source: http://stats.oecd.org/Index.aspx?DataSetCode=TIVA_OECD_WTO

 

 

 

Endnotes

[1] I am grateful for a grant from the Asia New Zealand Foundation which enabled me to examine some of the ideas in this paper in South East Asia.

[2] There is not the space to discuss whether the French foreign minister Robert Schuman (1886-1963) should be a joint recipient.

[3] The EU and ASEAN countries are treated separately.