Boxer Mike Tyson famously said, “Everyone has a plan until they get punched in the face.” He was pointing out that sometimes things don’t go the way you think. There can be unintended consequences. Your opponent can counterpunch, so a plan B can be useful. The US government intends to use tariffs as a way of incentivising other countries to do things that are helpful to the US; things like curtail immigrants or drugs travelling across the border, or to shift manufacturing jobs to America. President Donald Trump has described the word “tariffs” as “the most beautiful word in the dictionary” so it’s clear he likes the idea of using tariffs.
The plan is already under way. First, an initial 10% on goods from China has been doubled to 20%, and Canada (which was landed with an initial 10% on energy products) and Mexico have been hit with a 25% rate on most other goods. If these countries change their drug, migration and manufacturing policies, the US will look to review the tariff levels.
New Zealand had its own tariffs for many years, as was fashionable. But now we seek fair trade, with no tariffs, quotas or other barriers in our trading relationships. It matters to us as a small trading country at the bottom of the world. Multilateral co-operation and enforcement frameworks such as the World Trade Organisation are vital.
The US has its own history of tariffs. An excellent example of how things can end up like a punch in the face, is the passing of the 1930 “Smoot-Hawley” Tariff Act. This raised tariffs on more than 20,000 imported goods, despite a petition signed by 1028 economists asking President Hoover to veto the legislation. The theory was it would save jobs and protect local producers from international competition after the sharemarket crash in October 1929. But it made things worse. America’s trading partners punched back. They retaliated, just as Canada (and probably soon Mexico) is doing now.
The world economy and geopolitics have evolved significantly since the Great Depression and what happened then may not happen now. However, history can perhaps provide some small insight. After the Smoot-Hawley act passed, US imports fell by 66% from US$4.4 billion in 1929, to $1.5b in 1933. So that must have been good for domestic industries? Well no, because other countries punched back with their own tariffs, and sourced imports from other countries. As a result, US exports fell by 61% to $2.1b and gross national product (GNP) fell from $103.1b to $55.6b in 1933. The factories producing export goods couldn’t sell their products, so staff lost their jobs. Unemployment at 8% in 1930 jumped to 16% in 1931 and 25% in 1932-33.
So how does this fast-changing situation affect New Zealand? Unlike 100 years ago, we are affected very quickly by changes in our exchange rate, interest rates, commodity prices, share markets and trade. For example, if inflation goes up in the US because of the new tariffs, international interest rates may go up, thus reducing the speed of falls in mortgage rates. Dairy commodity prices might rise, but so, too, might international oil prices, pushing up our fuel prices and inflation. Our dollar may fall, making it cheaper for tourists to visit, but the cost of servicing our rising national debt will be more expensive. Chinese-built EVs may be more readily available and cheaper here as cars are diverted from the US market.
There will be all sorts of positive and negative impacts and unforeseen outcomes – we just don’t know what will happen. But we do know that it creates more uncertainty, and that’s not helpful to anyone. Either way, we need to be fleet of foot and have a plan B.
Conor English is a director of Silvereye, a Wellington-based government relations and PR firm, and a former exporter, CEO of Federated Farmers and independent adviser to the Reserve Bank of New Zealand.
