INSIGHTS BLOG

TRUMP, TRADE WARS AND NZ

Mark Lister, 7 March 2018

When Donald Trump was elected President in late 2016, one of the biggest risks he posed was a dramatic change of tack on the trade front.

As he took office, he seemed to soften his stance from the hard-line rhetoric of the campaign trail.

However, that changed with last week’s surprise announcement of his intention to introduce tariffs of 25 per cent on steel and 10 per cent on aluminium.

We don’t yet know any of the detail, nor the intended timing. There may well be exemptions for some countries, while there’s also a possibility the initiative doesn’t get off the ground given the dysfunction in US Congress.

Other countries will consider retaliation. China is keeping tight-lipped for now, while Europe has reacted with strong threats of their own. As the biggest exporter of steel and aluminium to the US, Canada hasn’t minced words either.

Fighting fire with fire might work, as it has in the past. In 2002, the Bush administration imposed steel tariffs, before reversing them a year later in response to global retaliation.

As many as 200,000 Americans are estimated to have lost their jobs as a result of the tariffs, primarily in the machinery, manufacturing and transport sectors.

During the last few days many American companies, from the automotive industry to Campbell’s Soup, have criticised the proposals and highlighted the negative consequences they could have on parts of the US economy.

For New Zealand, the direct impacts of what Trump is considering are minimal. The US is our third biggest export market (behind China and Australia), taking 11.1 per cent of our goods and services exports in 2017.

However, the top three products we sell to the US are meat, wine and dairy products. These represent almost half of our goods exports and for the time being, they aren’t in the firing line at all.

Tourism is another industry that relies a lot on the US. It’s our third biggest market, representing nine per cent of visitor arrivals, and it’s been one of the fastest growing markets due to much better access from airlines these days.

Still, it’s not so much the immediate risks that should worry us, but the potential flow on effects. If the US continues down this path and other major countries retaliate, things could quickly escalate.

If the US, Europe, China and Japan go tit-for-tat in an ensuing trade war, economic activity will be dented and global growth will end up lower. That’s not what we want just as things are starting to get back on their feet.

It could also prove negative for the US over the longer-term, once the initial gains have worn off.

New Zealand is a small, open economy that is hugely dependant on our ability to do business easily with the rest of the world. We rely heavily on exports, which account for some 30 per cent of our gross domestic product.

Our government and trade advisers have no need to panic, but it’s a space they’ll need to watch very closely.