The US has done this before – and it did not go well.
By Connor English, director of Silvereye, a Wellington-based government relations and PR firm. He is a former exporter, CEO of Federated Farmers and independent adviser to the Reserve Bank of New Zealand.
Boxer Mike Tyson famously said, “Everyone has a plan until they get punched in the face”. He was pointing out in his own unique, direct way, that sometimes things don’t go the way you think. There can be unintended consequences. Your opponent can counter punch, so a “Plan B” can be useful.
The United States government has a plan 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 over the border, or to shift their manufacturing jobs to the US. US President Donald Trump has called the word tariffs “the most beautiful word in the dictionary” so it’s clear he likes the idea of using tariffs. It is not a new logic.
Maybe this plan will work?
The plan is already underway. First up, a 10% tariff on goods from China, and energy products from Canada. Tariffs will be set at 25% for most other goods from Canada and Mexico. If these countries change their drug, migration and manufacturing policies, the US will look to review the tariff levels. That’s the new deal.
New Zealand had its own tariffs for many years, as was fashionable. For well over a century, tariffs were a source of significant government revenue. 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.
But it didn’t make things better, it made things worse.
The US’s trading partners punched back. They retaliated, just as Canada (and probably soon Mexico and the European Union) 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 as to how this might play out.
After Smoot- Hawley passed – yes – US imports fell 66% from $4.4 billion in 1929 to $1.5bn in 1933. So that must be good for domestic jobs and industries? Well no, because other countries punched back with their own tariffs, and sourced imports from other countries rather than the US.
As a result, US exports also decreased 61% from $5.4bn to $2.1bn. GNP fell from $103.1bn in 1929 to $55.6bn in 1933, a drop of around 50% over four years.
So rather than create jobs, jobs were lost, and plenty of them. The factories that produced those export goods couldn’t sell their products, so staff lost their jobs. Unemployment, at 8% in 1930, jumped to 25% in 1932–33.
So how does this fast-changing situation affect New Zealand? Unlike 100 years ago, we get impacted very quickly by the transmission of changes in our exchange rate, interest rates, commodity prices, share markets and trade flows. This then flows through our economy.
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 any reductions on our 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 increasing national debt more expensive. Chinese-built EVs may be more available and cheaper here as cars are diverted from the US market.
There will be all sorts of positive and negative impacts, unintended consequences and unforeseen outcomes – we just don’t know what will happen. We do know that it creates more uncertainty, and that’s not helpful to anyone.
So will it be a punch in the face, as Mike Tyson suggests, or a pat on the back? Either way, we need to be fleet of foot and have a “Plan B”.
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