It took nearly 50 years to achieve reasonable trade policy stability, from the creation of the General Agreement on Tariffs and Trade in 1947 to the World Trade Organisation in 1995.
Why assume it will not take as long to clean up Trump’s mess?
In the meantime, the uncertainty he has created cannot be undone, even if he backs down completely. Not even his removal from office or the election of a President in 2028 committed to the old Washington Consensus will entirely reverse the harm he has caused in just two weeks since his “Liberation Day” — April 2.
No one can be confident investing when the antics of the world’s most powerful individual can move financial markets 10% on any given day and with the US delivering such sudden, radical and irrational policy swings and appearing at risk of autocracy.
Yet Luxon’s rhetoric in his speech last week to the Wellington Chamber of Commerce about his being up for a fight was — as Peters unsubtlety points out — “hysterical and short-sighted”.
Luxon’s additions to an otherwise well-reasoned speech written by experts in the Department of the Prime Minister and Cabinet surely annoyed the original authors.
As previous Prime Ministers understood, New Zealand’s case for free trade has always been the case for unilateral free trade since small, developed economies can never benefit from trade protectionism.
Whatever the likes of the US, EU, and China do, New Zealand is always best to maintain an open economy, devoid of tariffs, import quotas, production subsidies or any other kind of protectionism.
This is the very reason removing protectionism globally proves so difficult. Large economies such as the US, EU and China can avoid their consumers paying the full cost of protectionism because their policies can affect world prices and production.
Small economies, such as New Zealand and almost everyone else, cannot, so the cost of any protectionist measures they take are always paid entirely domestically.
Even the idea in the Prime Minister’s speech of further expanding the Comprehensive and Progressive Trans-Pacific Partnership carries risk if new members do not fully share the original vision of its founders, New Zealand and Singapore.
New Zealand’s trade policy experts know this from bitter experience. The Asia-Pacific Economic Co-operation process was going swimmingly in the early 1990s, with its original members committed to free and open trade and investment in the Asia-Pacific by 2010 for industrialised economies and by 2020 for developing economies. Then, in 1998, someone decided to let in Russia.
Peters’ more cautious approach makes sense, including to keep out of Trump’s line of sight.
Likewise, Willis is wise not to allow the current uncertainty to affect her overall Budget strategy, including her tight allowances for net new spending.
Those allowances may be unrealistic for other reasons, including, as I outlined before Trump’s re-election, his return requiring a doubling of our defence spending.
But the long-term damage of Bill English and Grant Robertson’s profligacy after the Canterbury earthquakes and Covid, respectively should remind Willis of the danger of loosening the purse-strings too much after a crisis.
As Treasury pointed out last year, successive New Zealand Governments since 2008 have proven all too ready to borrow dramatically during crises but entirely unwilling to pay it back when times are better.
Even if Willis had a clear idea of where Trump’s idiocy will lead and what it will mean for New Zealand, she does not have any room to increase borrowing — assuming heroically that fiscal stimulus would be the right response anyway.
Similarly, under new governor Christian Hawkesby, the Reserve Bank also plans to be more prudent than after the Canterbury earthquakes and Covid, with Conway arguing the current turmoil calls for “cool heads” and “a steady hand on the tiller”.
Presumably, that means Hawkesby’s Monetary Policy Committee doesn’t plan any big emergency cuts to the Official Cash Rate, let alone “quantitative easing”, the modern term for printing money.
Conway points out the trade war will probably both fuel global inflation and lower global growth, with the overall impact on New Zealand not yet known, although he suggests the latter might have the bigger domestic effect.
Trade Minister Todd McClay’s early hopes the trade war could have upsides for New Zealand, because we would face lower tariffs into the US and China than others, appear overly optimistic — although he’s right there will inevitably be a few local winners, such as red meat and wine producers competing in China against California and Texas.
It probably can’t hurt for Luxon to have a few chats with other heads of Government about the situation — after all, that’s part of his job. But, for that very reason, it’s unseemly for him to be posting action shots on social media of himself holding a phone.
It suggests a degree of desperation and that his efforts are more about wanting to compete with his own foreign minister for attention than a serious response to the times.
In any case, he needs to keep his powder dry because what we’ve seen so far from Trump is only the start.
His defenders — including Luxon’s mentor Sir John Key — argued Trump would be good for the global economy since his tariff threats shouldn’t be taken seriously.
That view has been revealed, to use the phrase of the month, as “dumber than a sack of bricks”.
The risk now is that Trump’s fragile ego has been damaged, with neither Chinese President Xi Jinping nor EU President Ursula von der Leyen backing down against his tariff lunacy and the currency and bond markets making clear he is risking the US’s role as economic hegemon (supreme leader).
Trump’s response may be to double down on tilting away from Nato and the US’s Indo-Pacific allies towards leaders in Moscow, Tehran and Pyongyang, with whom he has greater personal rapport.
Even worse, the restoration of Trump’s manhood may depend on him following through on his threats against Canada, Greenland and Panama. As I wrote on election night, the US has entered its most dangerous period since the Civil War.
