Donald Trump campaigned on widespread tariffs in 2024. Photo / supplied
United States President Donald Trump’s dramatic tariff announcement has upended a decades-long status quo for global trade.
As a small trading nation that relies on exports to pay our way, this is a concern.
Today’s announcement of a 10% tariff on all New Zealand exports is smaller than that imposed on many nations but will still require a major adjustment for New Zealand traders.
More broadly, the US tariff policy will have implications for all aspects of the global economy - from China’s GDP to New Zealand’s mortgage rates.
Put simply, tariffs are taxes applied to imported goods. They are almost as old as trade itself.
The earliest examples date back to ancient Mesopotamia, around 2800-2600BCE. These early tariffs were essentially customs duties collected at city gates on traded goods.
That’s more or less exactly what the Trump tariffs will be, although these days, the tariffs are paid electronically.
Trump has repeatedly stated it will be foreign companies that pay the tariffs, not US consumers.
That, as numerous critics have pointed out, is not technically correct.
If you want to import goods into the US, you must register with US Customs and Border Protection to become an importer of record.
It’s no mystery. The US already has tariffs in place on most imported goods (although the average level is about 2.5%), so the systems are in place.
That’s one of the reasons why Trump can act so quickly to increase the tariffs.
This is a different proposition from who actually pays the tariff. You’d have to assume it’s what Trump is talking about when he claims foreign companies will pay.
Faced with a tariff (which they have to pay), US importers have three choices.
They can bear the cost themselves and take a hit to their margins and profits.
If they have enough leverage, they can try to demand that the foreign companies drop their prices to cover the cost of the tariff.
Or they can pass the cost through to the retailers and consumers they sell to.
Trump’s confidence suggests he believes exporters will be so keen to get their goods into the US, they will cut their prices.
If they have no markets that can match the US price (including the new tariff), then that might be the case.
But where they can find other markets that will take their goods at a better price, they’ll go there.
It’s been suggested by economists that there could be an upside for New Zealand in this.
If the supply of goods that are no longer economical to sell into the US increases, we may actually see some lower prices.
Ultimately, the pass-through of higher costs to consumers is the whole point of tariffs.
So in the first instance, they are inflationary to US consumers ... not consumers in the nations doing the exporting.
The economic logic for introducing them, is that they impart a pricing advantage to local producers by making imported goods more expensive.
So, that is, by definition, inflationary.
US consumers will pay more for imported goods.
Unfortunately, the prospect of Trump’s tariff policies boosting US inflation is one of the most pressing issues for the New Zealand economy.
Before we even get to the trade fallout, Kiwis are already being hit in the back pocket.
That’s because US inflation – or assumptions about the prospect of it – pushes up US interest rates.
Expectations that the US Federal Reserve would keep cutting their equivalent of the Official Cash Rate (the Fed Funds Rate) this year have already gone up in smoke.
So wholesale bond yields have been rising in anticipation of higher long-term rates.
That has three flow-on effects for Kiwis, none of them good:
1) Your mortgage rate
The first is that higher US borrowing costs push up the cost of debt for our banks – which still fund a sizeable portion of their mortgage lending from international markets.
So the extent to which local banks can pass on OCR cuts made by the Reserve Bank is potentially lower than it might have been.
The Reserve Bank of New Zealand (RBNZ) could compensate by cutting more aggressively but may bump up against its own inflation woes (see below).
Kiwibank has suggested it may now need to cut the OCR below 3%.
2) The Kiwi dollar effect
A second effect of higher US inflation is that it can be exported our way via the currency.
Higher US interest rates push the US dollar higher and the Kiwi dollar lower in relative terms.
That means the cost of international goods rises for New Zealanders and adds inflationary pressure to the economy.
The most obvious example is the cost of petrol, which we’ve been paying more for this summer as the value of the Kiwi has fallen.
It is off 11% since late September – from US63c to US56c yesterday.
While the RBNZ still looks set to cut the OCR by another 50 basis points at its next meeting next week, the higher cost of imports and higher inflation could limit the ability to cut rates as far as they might otherwise have.
That is a potential headwind for our economic recovery.
Although, it is important to mention that the lower currency does boost New Zealand dollar returns for our exporters, which are looking good for the current season.
The lower Kiwi will also make us more attractive to US tourists – although bad luck if you were planning a US holiday this year.
3) KiwiSaver fallout
Finally, higher interest rates are bad news for stock markets, as investors can get relatively better returns from less risky investments in cash.
We’ve already seen Wall Street rattled by Trump’s tariff announcement
The benchmark S&P 500 has already fallen into correction territory (down 10%) this year. Although today’s announcement came after Wall Street closed, the after-hours futures market has indicated it could fall another 3% in the next session.
There are concerns we could see market fallout spread, potentially causing a global sell-off.
That would hit our already sagging KiwiSaver balances hard and flow through to the local NZX 50, putting more economic pressure on our listed companies.
The US became New Zealand’s second-largest export market last year, according to new Stats NZ data.
The growth was driven largely by demand for our cheap beef and edible offal (heading into US burgers and processed meat).
Because they need the beef, we previously had a sizeable quota of exports set at a low tariff rate.
That may now be gone with the minimum 10% tariff.
The Meat Industry Association said today “the US beef herd is at historically low levels and record domestic beef consumption, we are still expecting high demand from the US for beef, despite the tariff measures”.
Our core dairy exports, such as cheese and milk powder, were already subject to significant tariffs in the US (outside of tight quotas).
However, the US is a significant market for Fonterra due to trade in specialist dairy protein ingredients that are used by US companies in the manufacture of nutritional products for US and global consumers.
In fact, the US was Fonterra’s second-largest market by value for exports from NZ in the year ending September 2024.
The technology sector could also be vulnerable.
A lot of Kiwi tech companies – like Rocket Lab – have been largely bought out by US firms, so they wouldn’t be affected.
But others, like the NZX-listed F&P Healthcare, have already found themselves in the gun because they have moved manufacturing to Mexico.
F&P Healthcare’s shares fell sharply on the announcement today.
One other immediate problem for New Zealand exporters will be the dampening economic effect new tariffs could have on our largest trading partner – China.
China’s economy has already been growing more slowly than hoped since Covid.
The slowdown there has already hit tourist numbers here and forestry exports. Thankfully, dairy prices have remained solid.
But our economic recovery hopes are closely tied to China’s economy, and the prospects of it taking another hit this year are ominous.
Global economic think-tanks - like S&P Global and the IMF - have already warned that tariffs may curb global growth this year.
Economists love efficiency and like policies that maximise wealth creation and minimise cost. Most argue that on aggregate, protectionism makes the world a poorer place.
There are few, if any, economists of note who support the widespread use of tariffs and subsidies across the global economy.
There are some – usually on the left – who make the case for targeted use to support struggling or developing industry sectors or developing economies.
The argument for tariffs and protecting local industries is that it will create jobs (or retain them) and increased local production and economic activity will boost GDP growth.
But in the same way printing money or artificially lowering interest rates can give an economy a short-term boost (as it did through Covid), it doesn’t generate real wealth in the long run.
When local businesses are protected with tariffs, the incentive to produce goods more efficiently is removed.
They are effectively being paid to produce more expensive goods than their foreign competitors.
The competitive drive to improve products is also removed.
We saw it in New Zealand in the 1950s, 1960s and 1970s. And we saw it in the Soviet Union.
Market economists consider protectionism and the distortion of market competition to be among the key failings of last century’s socialist policies.
It’s odd to see the great capitalist champion Trump and the Republicans (the party of Ronald Reagan) pursuing a failed socialist policy.
Since the 1980s, a large consensus of economists has argued freer trade has resulted in greater global economic growth.
Many felt policymakers had learned a lesson from the failures of the 20th century.
Trump, in his defence, prefers to look through the protectionist failures of the 20th century and cited the success of US tariff policies in the Gilded Age of the late 19th century.
While free trade might boost global growth, he is only interested in America.
He seems to believe in American exceptionalism and the idea it can grow its economy better in isolation.
Perhaps he’ll have some short-term success wielding US political might in this fashion.
History (and classical economics) suggests it won’t work in the long run.
Either way, it’s an extremely high-stakes experiment that doesn’t look good for the rest of the world.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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