Phil O'Reilly: NZ's economy needs to be ready for a trade war

Tariffs always have flow-on effects for many other countries. Photo / AP

President Trump's decision to place high tariffs on steel and aluminium imports into the United States could affect New Zealand, particularly as the President's position so far appears to be that these tariffs will apply to all countries without exemptions.

We don't export huge quantities of steel or aluminium to the US so we might feel the tariffs won't affect us much. Regrettably, that is unlikely to be the case. It is more likely New Zealand will be hit financially, not just by the proposed steel and aluminium tariffs but also by the effects of the "fight back" from other countries, and US responses to those actions.

President Trump has, in part, justified these tariffs on the grounds of what his administration says is "anti-competitive behaviour" by some countries, with a particular eye on China. Yet, tariffs of this sort are almost certainly in breach of World Trade Organisation (WTO) rules and will doubtless lead to retaliation from other countries that trade with the United States.

The European Union, for example, is reportedly planning a suite of retaliatory measures that will apply to more commodities than just US steel and aluminium exports to Europe. Indeed, the EU has already talked about putting special tariffs on vehicles and consumer goods, such as Harley Davidson motorcycles and Bourbon whiskey.

When a trade war of this sort starts, countries often try to protect their most valuable domestic industries. As New Zealand knows to its cost over many years, one of the common areas that many governments try to protect through tariff barriers is food – New Zealand's major export.

The Government and businesses here need to be aware that countervailing tariffs and other restrictive border measures aimed at punishing the US, will probably have a knock-on negative effect on many other countries.

For example, we could find New Zealand food products could be taxed more at the border of the country they are entering or even restricted from entering a country simply because that country is responding to the US tariffs, or more cynically because they are using the US measures as an excuse to increase their own tariffs for other reasons.

Our potential problems don't just end there either. As world trade becomes distorted by these tariff barriers, goods and services are likely to flow to different markets in often illogical ways.

The Canada steel industry for example, the largest exporter of steel to the United States, has already indicated publicly that it may wish to sell its steel elsewhere. If that becomes the case, then that may well change the price of steel, either upwards or downwards, across world markets.

And this could all be to the detriment of New Zealand businesses and exporters who, even though they aren't directly involved in the trade war, are trying to export into those same markets.

The very nature of international trade means all countries are interconnected globally. Measures to restrict or distort the flow of goods and services throughout the world will always have impacts far beyond the borders of the largest nations. Usually it is small, open economies like New Zealand that have the most to lose.

What should New Zealand do as a result?

Firstly, and most obviously, it would be very foolish for us to threaten or put in place our own retaliatory tariffs. New Zealand's influence in the world and our good name in trade is based on the idea that we are a small, advanced and open economy that advocates against the very kinds of measures that President Trump is taking. For us to join this unhelpful retaliation would send a very bad signal to the rest of the world.

Secondly, we need to work through the WTO and with like-minded countries to reduce or remove these American tariffs and any retaliatory measures as soon as possible.

Regrettably, that is likely to be quite difficult to do. Each time a new tariff or a new protection is granted, it inevitably creates a domestic lobby for its continuation. Just because these proposed US tariff measures are quite possibly in breach of WTO rules, doesn't necessary mean they will go away any time soon.

Thirdly, we should be dealing directly with our American friends and colleagues, pointing out to them that policies of this sort actually serve only to increase the price of goods and services in the United States, to the detriment of the very hard-working Americans President Trump says he is trying to protect.

Republicans in both houses of Congress have already been sending out this message loud and clear. New Zealand should seek to support them and the US business organisations who will be arguing very publicly for the removal of the threat of these tariffs.

Fourthly, and very importantly, we should ensure our own economy is fit and healthy enough to get through economic shocks of the type that could occur as a result of a tariff war started by the United States.

This points to the importance of having low Government debt as a proportion of GDP and having very efficient Government spending, competitive markets for goods and services and high skill levels in our economy.

It also means having as many options to trade as we can — hence the importance of the newly signed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and other agreements on the horizon, such as Regional Comprehensive Economic Partnership (RCEP) with India and China.

A competitive economy with low and efficient Government spending and a globalised outlook isn't just important to business, it is equally important to citizens and communities since it is the livelihoods and the wealth of individuals and families that might well be impacted by this emerging protectionism.

• Phil O'Reilly is the managing director of Iron Duke Partners Ltd and the former head of Business NZ.