President Trump’s “on-again, off-again” tariffs, and the uncertainty associated with them, have thrown financial markets into a tailspin over the last couple of months. Although New Zealand is not directly in the firing line from tariffs yet, it’s a possibility in coming weeks. Our Chart of the Month shows what Kiwi exports might be most exposed to the US market, with primary sector exports but also some specialist machinery most at risk.
Markets sour as tariff concerns materialise
After last November’s presidential election, markets had bet on the new administration’s policies stimulating growth. New and extended tax breaks, and further deregulation, were apparently set to unleash further economic growth. However, since late January, when the President first moved to impose tariffs on Canada and Mexico and increase tariffs on China, markets have been far less upbeat. The US share market has dropped as much as 10%, US 10-year government bond rates plunged by 60 basis points, and the greenback has given up all the gains it had made since early November. Markets had earlier been happy to ignore the clear risk to growth and inflation that tariffs present, but quickly woke up to the economic shock they will cause once retaliatory tariffs and actions started to be announced.
Agriculture next on the tariff agenda?
Donald Trump’s next big tariff target appears to be agricultural imports, with indications he will impose a blanket 10% tariff on all agricultural products entering the US from early April. Chart 1 shows the largest export categories from New Zealand to the US, with wine having the greatest concentration of exports going to the US – last year, 35% of our wine exports went to the US, totalling almost $700m.
Other primary products with a high degree of exposure include casein and meat. Although exports of fruit, seafood, and dairy to the US also represent hundreds of millions of dollars, these commodities have much less overall exposure to the US market, so these industries are likely to be less critically affected by tariffs.
For wine, the potential tariffs come at a difficult time, as the industry has already been grappling with softer global demand and softening prices over the last couple of years. Higher prices for foreign wine in the US could easily see consumers switch from drinking a Hawke’s Bay syrah to a Californian zinfandel, further hitting demand for our product.
Beef makes up over $1.8b of New Zealand’s meat exports to the US, with 42% of our beef exports going to America. However, the ability for US consumers to switch to home-grown beef is much more constrained at the moment, given dry weather conditions in the US and beef cattle numbers that are at a 70-year low. Therefore, the effects on returns to beef farmers could be relatively limited.
Chart 1 also demonstrates the importance of the US for some of our manufactured exports, with the machinery exports often building on our primary sector expertise, such as harvesting equipment. Businesses in these industries will be keenly watching developments around plans for further tariffs that might be introduced by the US.
Reciprocating often an own-goal
Finally, we have seen many other countries responding to the US by imposing reciprocal tariffs of their own. Yet most of the pain caused by import tariffs falls on businesses and consumers in the country that has imposed them. Part of the New Zealand economy’s success over the last 30-40 years has been built on making gains from increased trade and concentrating our production in areas that we are good at. The widespread reduction and removal of tariffs in the 1980s and 1990s caused disruption at the time, but it ultimately led to better economic outcomes for this country over the medium term.
Unlike Canada and Europe, the Australian government has indicated that it will not follow suit by imposing reciprocal tariffs on products from the US after being hit with tariffs on steel and aluminium. New Zealand should also adopt this approach. Imposing import tariffs of our own would only add to the pain and limit our own economic growth, at a time when our all-important export sector will already be under pressure from the slowing global economy, thanks to the economic illiteracy of America’s protectionist approach.
