Volatility in stock and bond markets has surged following President Donald Trump’s tariff announcement. Sean Keane explains why. Video / Alyse Wright
Opinion by Bruce Cotterill
Bruce Cotterill is a professional director, speaker and adviser to business leaders. He is the author of the book, The Best Leaders Don’t Shout, and host of the podcast, Leaders Getting Coffee.
New Zealand has taken a measured response to potential 10% tariffs on exports to the US.
Having weathered a long recessionary period for the past few years, the last thing we would appear to need is the world economy collapsing under a tariff-inspired trade war.
But tariffs, a word many of us had almost forgotten and some have forgottenhow to spell, are back and they’ve been creating havoc.
In case you missed it, which is highly unlikely, US President Donald Trump has introduced a wide-ranging tariff regime targeted at his nation’s trading partners.
Initally, it seemed the tariffs, targeted by country, represented a reflection of the trade deficit between the US and the country concerned. In other words, a high trade imbalance, due to the US importing vastly more from a country than it exported to that country, would attract a higher tariff on its imported goods with the goal of restoring some of the balance.
As you might expect, Trump’s announcements delivered tumbling sharemarkets, confused bond markets and otherwise unpredictable side effects.
Those side effects prompted many of those affected countries to run directly to the President this week, to make it clear what he was proposing was unfair, unaffordable or unworkable. Some, like China, responded by reciprocating and placing greater tariffs on US-sourced imports. Others, like the EU, threatened to do the same, but ultimately backed down. The US responded to China’s challenge by increasing tariffs further. At the time of writing, the original US tariff on Chinese imports of 37% had risen to 124%.
Such behaviour is foreign to a small country that has operated a free-trade model for decades. Free trade means we operate an economic policy where goods and services are exchanged between countries free of obstacles, tariffs or subsidies. At times this has caused us hardship because our exporters have had to compete in markets on a free-trade basis while other countries operating in those same markets offer subsidies and other support to their exporters – our competitors.
But, as the saying goes, what doesn’t kill you makes you stronger, and while our exporters have had to work harder, the outcome is our export sector is regarded as high quality, competitively priced and well liked. We are also well networked, via a combination of the efforts of our trade and foreign affairs teams around the world.
The Government is negotiating a free-trade agreement with India. Photo / POAL
Measured response
As an export nation we are highly dependent on international trade working well for us. We like free-trade agreements because we usually benefit from such arrangements without giving a lot away. The Government is negotiating a free-trade agreement with India that would provide something of a game-changer for our export economy.
But it is the US where everyone is looking at the moment. That pushback from other major economies resulted in the President putting his aggressive tariff position on hold for 90 days, for every country except China. One can only imagine that the on-hold period will provide an opportunity for negotiation and, hopefully, reflection, resulting in a less-burdensome regime.
The on-hold position gave rise to a modest recovery in the sharemarkets and breathing space for national officials trying to work out “where to from here”.
In New Zealand, our politicians are handling the situation with a calm reassurance. Sure, the prospect of a 10% tariff on exports to the US means we are less affected than some of the larger trading partners. But America, our No 2 export destination, is an important market to us and it’s great that our response seems measured, respectful and constructive.
Of course, when there is a lot of information circulating rapidly, there will always be inaccurate reporting. Even 1News, the programme we should be able to rely on when major international events are taking place, had it wrong this week. In discussing the increased tariffs on China, it stated the then rate of 104% (since increased to 125%) would have the price of the top-of-the-range iPhone increase from $2891 to $5791, unless Apple sought to absorb some or all of the extra cost.
TVNZ’s mistake, and to be fair, they are not the only ones making it, is that tariffs are not levied on retail prices. Depending on the jurisdiction, tariffs and duties are typically charged on one of two formulas; either the price paid for the goods by the importer (the FOB price), which is usually on the bill of sale, or alternatively the landed cost, also known as the CIF price, which combines the price paid plus freight and insurance.
So let’s say we’re exporting wine to the US and we’ve attracted a 10% tariff. Our wine may have been exported at a base price of $8 per bottle. That bottle might retail in a US supermarket for $22. With Trump’s tariffs imposed, the FOB price will have 10% added, and so the new cost to the US importer becomes $8.80. Assuming margins are maintained, the new price is $22.80. Sure, it’s an increase, but at 10%, the impact is probably manageable.
So, why is the US government driving such a wedge through international commerce?
It’s clear that Trump’s goal is to bring manufacturing back to the US Rust Belt to which he owes his presidency. His America-first approach would have US manufacturing return to its former glory.
But many would suggest that horse has bolted. The reason the seats for Detroit’s cars are made in Mexico is it can make them cheaper there. Likewise the polo shirts from China. The international drive over the past few decades for manufacturing at the lowest cost has played into the hands of those countries with large populations of poor people and impossibly low wages.
Those decades have equipped countries like China, Taiwan and Vietnam to do it better, cheaper and more reliably than before. To rehabilitate the manufacturing sector in the US to a similar level would take many decades more.
Make no mistake. The US needs a manufacturing base. One reason is that plenty of people are suggesting the likelihood of war in an increasingly unstable Europe, and America may well be called upon in the next few years to defend its traditional allies.
Past conflicts have taught us that our ability to defend ourselves is at least partly driven by our ability to control the flow of resources for war. During both world wars, America’s manufacturing facilities were repurposed, becoming a central component of the delivery of artillery, transportation and technology.
But a future war will be fought quite differently to those past ones. Technology rather than troops will be at the forefront. If the US were to rebuild its manufacturing base to support a war effort, it has to pick its targets. And it should seek to rebuild with new technologies rather than the old ones.
After all, with America’s manufacturing base in its present state, it is hardly going to go to China and ask for rocket launchers and drones to be built, are they?
Prime Minister Christopher Luxon says New Zealand's exporters remain optimistic. Photo / Mark Mitchell
Back in New Zealand, the Prime Minister’s comment this week that our exporters remain buoyant and that they are confident in the quality of their products, is the right tone to be setting. And let’s face it, a 10% tariff is not going to knock us around too much.
Because, if there’s a country in the world that’s match fit when it comes to the hurly-burly of international trade, it’s the resilient little country at the bottom of the world that has to fight for every inch of shelf space it gets. That shelf space comes courtesy of great product, fair pricing, honest people and reliable delivery.
So, New Yorkers should rest easy. Those New Zealand salmon fillets, accompanied by a fine sauvignon blanc, on the tables of their finest restaurants, will not disappear from the menu because of a tariff.
Remembering Doc
This week, we learned New Zealand lost a sports medicine pioneer, with the passing of Dr John Mayhew, or Doc to those who knew him well. He has been my doctor since I arrived in Auckland more than 30 years ago and he’s looked after my wife for over 40 years. But he was more than a doctor. He was a friend and a mate and we often spent a consultation talking sports and politics for longer than we spoke about our health.
When Doc wrote advising his patients of his retirement for health reasons this year, I replied with the following.
John,
Thank you for your note.
When you set out from med school and started your medical career, I doubt that you anticipated the wide range of experiences, and the excellent career, that would follow. Yours has been a terrific career, and I have no doubt that, in particular, you led the development of sports medicine in this country. But it wasn’t just sports medicine for the elites. Rather, as weekend warriors we feel privileged that you have seen fit to look after our damaged bodies too. You should be extremely proud of all that you have accomplished over many years.
On a personal note, we are sorry to lose you. We have always wondered what would happen when you retired. Now, we have to work that out. Your knowledge and confidence in the right way forward will not be easy to replace. Our trust in your decisions on our behalf is almost impossible to replicate.
You deserve a great retirement and we hope it is one where your health plays ball. I hope to get one more consultation out of you before you go, if only to say thank you.
