Steven Hoadley: US impasse blows hot and cold for NZ

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NZ runs risk of catching chill when America sneezes - but there are upsides as well, writes Stephen Hoadley.

The United States shutdown is global news because it poses a threat to economies around the world. Is this the trigger to a global meltdown? More to the point, will the US political deadlock depress New Zealand's economy, and have other negative impacts? Yes, and no.

Let's be clear that there are two crises unfolding on Pennsylvania Ave, one facing the budget and the other, the debt ceiling. Both have negative economic consequences well beyond US borders. But catastrophic they are not.

First, the budget crisis means that the federal government now has no legal authorisation to dispense funds for salaries, goods, and services, save those designated essential by the President. Up to a million furloughed employees are now living on savings or credit, receiving no regular pay cheques to replenish their bank accounts. Prudent households are cutting back on spending. As US consumption declines, so will demand for imports such as New Zealand's.

Second, Republican Party refusal to raise the debt ceiling, leading to defaults on US payments due, will undermine the "faith and credit" of the US Government and, specifically, lower the US credit rating. This will erode the attractiveness of US Treasury bills and raise the cost of borrowing, further discouraging new investment and construction and further lowering demand for imports.

If the stock market sags, New Zealand's institutional investments will lose value. And the cost to New Zealand of private and sovereign borrowing from the US will rise. If the US dollar loses value relative to the NZ dollar, NZ exporters will face ever stiffer headwinds in the US market the longer the shutdown and default last.

The credibility of US leadership, and the attractiveness of the US market, must be taking a hit from the concurrent crises. This is bad for trade talks. Asian negotiating partners in the TTPA, and in Apec and the RCEP processes, are likely to stiffen their opposition to US demands, perceiving that major concessions may not yield economic dividends in a troubled and possibly shrinking US market. The result will be prolonged inconclusive negotiations or deals marred by exclusions, deferrals and escape clauses ... hardly the gold standard to which US Trade Representative Michael Froman and our Trade Minister Tim Groser aspire in the TPPA.

State and municipal governments and commercial enterprises are not directly affected - and least in the short-term - so it is far from the case that all US salary-earners are bereft, or that all consumers have stopped buying. Executive orders, fund reallocations, and supplemental appropriations (mini-budgets) could get many federal employees back to work, and buying goods and services again, releasing pent-up demand.

If the greenback were to dip against the kiwi, New Zealanders could import US products more cheaply. If the US economy slows and the country uses less energy, the price of surplus fuel will decline, benefiting NZ motorists.

Recurrent uncertainty in the US economy, and the enervating political wrangling, might induce more Americans to emigrate, and some will come here, no bad thing if they bring savings, energy, and innovation with them.

Curtailed US military deployments may provide an opportunity for the Defence Force to step in to fill gaps in peacekeeping, counter-piracy, or counter-terrorism. The research schedule of Operation Deep Freeze has been set back by the departure of US scientists from McMurdo, so perhaps New Zealand's Scott Base team can undertake more of these projects. Barack Obama's absence from the Bali and Brunei summits gave John Key a chance to chair the TPPA meeting.

At time of writing, stock markets are cautiously rebounding on the assumption that a budget compromise will be hammered out and the debt ceiling raised. But both the budget crisis and the debt crisis are embedded in the "checks and balances" of the US constitutional and political structure.

An election swing next year giving a majority to the Democrats in both the House and Senate can end the political party deadlock and prevent the twin crises from recurring. It's a comforting thought, but can we wait that long?

Stephen Hoadley is Associate Professor of Political Studies at the University of Auckland.

- NZ Herald

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