Building on comments he made three weeks ago at a formal Reserve Bank press conference, the Bank’s Governor is about to deliver a major speech highlighting the risk President Trump poses to the New Zealand economy.
The Governor, Graeme Wheeler, is worried about the potential impact of Trump’s “America First” trade policies.
In a worst case scenario, he says protectionism in America could cause prices for global commodities like milk to fall and our exchange rate could drop putting pressure on import prices.
He says that New Zealand faces several external sources of uncertainty; Europe and Brexit, China and the United States.
“The balance of risk in the global economy is on the downside,” he warns.
“Many of the risks in these regions are well known, and already reflected in relative prices such as interest rates, exchange rates and commodity prices.
“But the greatest source of uncertainty relates to the US Administration policies in respect to its ‘America first’ policy platform.
“Although a substantial US fiscal stimulus could be positive for growth in the global economy, the prospect of a marked increase in protectionism – coming at a time when global trade is growing slowly, and trade disputes are increasing – would have sizeable impacts on the global economy.”
There are two separate concerns about Trump.
First is his threat to levy a 45% import tax on China.
“In the run-up to the US election, Donald Trump labelled China a ‘currency manipulator’ (a view not shared by the IMF) and suggested that tariffs of 45 percent should be imposed on China, and tariffs also be levied on imports from Mexico,” says Wheeler.
The concern ould be how China might react to any 45% import duty.
Would it provoke a trade war?
And where would China sell the goods it could not sell in the US?
Within the US a 45% tariff would increase inflation and put pressure on interest rates and raise the dollar.
But Wheeler argues that there is a second concern that in an inter-connected and inter-dependent world such an action could have widespread consequences, particularly for a small open economy which depends on trade like New Zealand,
Wheeler says “Increased protectionist measures would represent a negative global supply shock. “
He cites recent simulations conducted by the OECD which estimate the potential impact of a general ten percentage point increase in trade costs imposed by the major trading economies – the US, Europe, and China.[i]
“Such an increase could have a major impact, especially on the countries introducing these restrictions: their GDP could fall by 2 to 3 percent; imports by 5 to 10 percent; and exports by 10 to 15 percent, with the US the worst affected.
“And the rest of the world would suffer too from falling GDP, imports, and exports. “
He then offers a sobering outline of what that 10% in trading costs (tariffs) could have on New Zealand.
“New Zealand would not fare well in such circumstances.
“Even if our exports of goods and services to the US—currently over $8 billion – were not directly subject to higher tariffs, we would be hard hit by a downturn in the global economy, including among our main trading partners, in response to the direct and indirect impact of protectionist measures.
“We would experience lower global demand and weaker commodity prices.
“Our exporters would also experience efficiency losses and increased costs if they faced disruptions to established supply chains.
“We would also experience spillovers as foreign producers’ diverted trade in response to tariffs and more general trading conditions.
“World financial conditions would also change as heightened uncertainty and a rise in global risk aversion would likely lead to higher external funding costs even as global growth slows. In such a situation portfolio flows may shift to larger more liquid financial markets and our exchange rate could fall, placing upward pressure on domestic prices and eroding real incomes.”
Wheeler has excellent contacts in the US among economists and bankers built up during his nine years with the World Bank headquartered in Washington where he rose to be its managing director of operations.
Those contacts and his understanding of the US political and economic system have undoubtedly informed this speech.
That the usually cautious Wheeler has decided to make the speech and has drawn media attention to it, suggests that not only are his concerns real but that he regards the risk of Trump’s protectionism and its consequences very seriously.
Ironically his concerns come at a time when the New Zealand economy itself is performing well. It is now in its eight years of expansion.
“In the absence of major shocks, prospects look reasonable for continued strong growth over the next two years driven by accommodative monetary policy, construction spending, and net inward migration.
“If these prospects are realised, the current expansion would be New Zealand’s longest in over 50 years.”
But note that phrase — “in the absence of major shocks”.
That’s how high the Trump stakes are for New Zealand.