Tariff wars reflect tectonic shifts

The world is undergoing a “tectonic shift” in the key factors influencing economies with the current tariff war a stark example, independent economist Cameron Bagrie says.

Cameron told the South Island Dairy Event that we cannot underestimate the structural change we are witnessing.

“We have been used to an environment where decision making has been commercially based.

“What we’re now seeing globally, is that geo-strategic, geo-political issues are dominating the economic imperative.”

“What we’re now seeing globally, is that geo-strategic, geo-political issues are dominating the economic imperative.”

While the shift had begun five to six years ago, the recent tariff war instigated by United States president Donald Trump’s “liberation day” had brought the shift to a new level.

Issues of national security are taking precedence and food, energy and technology are at the top of the priority list.

Trade is fast becoming the weapon of choice as a means of protecting them. 

New Zealand’s Ministry of Foreign Affairs and Trade had signalled the changes with a document released two years ago, “Navigating a shifting world,” Cameron says.

“No one wins out of the imposition of tariffs. Global growth is going to be weaker and global inflation is going to be higher.”

It highlighted that countries were exercising power and challenging the traditional rules-based system.

Security is now a big issue in regard to trade and economic policy. It’s security in food, security in energy, security in technology and not just security in terms of a military view, he says.

“Just-in-time, is now being replaced by just-in-case. Your supply chains are being altered and reconfigured around the globe and the world has become less globalised. There’s a lot more nearshoring, friendshoring and onshoring as opposed to offshoring.”

People tend to think about security through a military lens but the other important aspects of security have come into sharper focus over recent years.

Technology is a big one now, he says.

Explaining the US’s statement that New Zealand imposes 20% tariffs on the US, Cameron says it appears the calculation is related to a country’s trade surplus relative to the value of exports into the US.

The Chips for America Act (Creating Helpful Incentives to Produce Semiconductors for America Act, 2022) has aimed to cut the US’s reliance on China for semiconductor technology used in computer systems. Other countries have joined in enacting similar laws, Cameron points out.

“Why is that important? Because the chips control the computers and the computers control the machines.”

While China has been hit hardest by the US tariffs, New Zealand trade could also be affected by tariffs meted out to other Asian Countries.

“The whole of Asia got whacked pretty hard so Asia is going to take an economic hit. They (Asian countries) will look to redirect some of their trade to Europe but that’s going to have an effect on Europe manufacturing too. What will they do in response? No one wins out of the imposition of tariffs. Global growth is going to be weaker and global inflation is going to be higher.”

Explaining the US’s statement that New Zealand imposes 20% tariffs on the US, Cameron says it appears the calculation is related to a country’s trade surplus relative to the value of exports into the US.

In New Zealand’s case we export around US$9.5billion worth of goods and because we import less our trade surplus is about $1.9billion. 

“That’s roughly 20%. Is that a tariff number? No. It’s just a pretty basic calculation.”

Countries such as Vietnam, which exports $133billion worth of goods and imports just $13billion have been “walloped” with tariffs of close to 50%.

“They export a lot of goods because they have cheap labour. They’re not a wealthy country and they’re never going to be able to afford to buy a huge amount of American goods so they’ll always have a big surplus.”

Unlike New Zealand where inflation had been brought down to 2%, albeit through harsh recessionary factors, the US economy is still sitting at 3.3% inflation.

Tariffs are likely to create inflationary pressures and the US economy is less well placed to cope with these, he says.

Money markets had started to factor in that the US Federal Reserve would not be cutting interest rates while the New Zealand central bank is.

That’s putting pressure on the New Zealand dollar value and one of the reasons it’s been sitting in the 55 to 60 cent range when compared with the US currency instead of a 60 to 65 cent range.

In his view, long-term fair value for the New Zealand currency is around 65 cents but it needs to be sitting “south” of that for another five years largely due to the country’s large current account deficit – $26.4billion or 6.2% of Gross Domestic Product (GDP).

The value of New Zealand exports had dropped from 30% of GDP to 24% and the value of the dollar relative to the US dollar was helping shift the playing field for exporters.

It isn’t sustainable to continue with the current account deficit where it is and it is imperative that export performance improves.

“That’s roughly 20%  – is that a tariff number? No. It’s just a pretty basic calculation.”

On the National government’s push to double export value, Cameron says there are two factors at play and to date there has only been a significant focus on one side.

“Side number one is you’ve got to have demand. You’ve got to have someone you can sell the stuff to. And the government’s been doing a pretty good job getting New Zealand back on the international radar.”

It had been working at boosting trade through trade agreements and negotiations but it had to do more on the other aspect of lifting exports – the supply side. 

“That’s roughly 20%  – is that a tariff number? No. It’s just a pretty basic calculation.”

“The building blocks of improved export performance is not just about demand, it’s supply. You’ve got to actually produce the stuff. And this is where you think about enablement functions such as water storage.”

Improving port capacity and roading were also important in enabling the process of getting goods to market.

He believes capital investment to support private enterprise to increase production shouldn’t be a limiting factor but he is critical of banks in New Zealand.

“I think we have a structural problem with our banking sector where banks are pricing for risk but don’t actually take risks – they’re too focussed on the vanilla housing market. Ultimately if you pour in more money into a less productive sector then you’re going to get a less productive economy.” 

Banks had made billion dollar profits but impairments made up only 0.08% of their loans. 

“That tells me they haven’t actually been taking an awful lot of risks.”