Donald Trump’s trade policies will add to global inflation pressures but won’t threaten financial stability unless retaliation spirals out of control, according to the Reserve Bank (RBNZ).
Swing states with manufacturing-based economies, such as Michigan and Wisconsin, helped the former US President win a second term on Wednesday night.
This may be partly due to his promise to use tariffs to bolster American manufacturers and add costs to Chinese competitors, which have taken jobs away from these states.
Whether or not his plan will create more manufacturing jobs and grow the US economy is up for debate, but it is almost guaranteed to make the global economy less efficient.
Global central bankers warn that trade barriers will drive inflation by pushing up prices across the board. Tariffs raise the cost of imports, making them more expensive than domestic goods and contributing to higher overall prices.
During a briefing on financial stability, RBNZ deputy governor Christian Hawkesby told Parliament independent central banks could easily manage this extra inflation pressure.
The key economic components of his platform were higher tariffs on imports, lower taxes within the US, less regulations, and lower levels of immigration, he said.
“We think that [Trump’s policies] are, on the margin, a higher inflation package than the alternative but one that’s very much manageable in the world of operationally independent central banks”.
The threat to NZ’s financial stability would only occur if these policies prompted retaliation from China and others which spiralled into a trade war — or worse.
“There are risk scenarios that rely on whether there is tit-for-tat escalation, who does what in response, and whether things broaden out from there,” Hawkesby said.
“With our financial stability hats on … we ensure that we've got a financial system that's resilient, not just for the central case, but for outlier cases that can happen”.
Dark corners
The RBNZ's recent stress test asked banks to identify scenarios that might lead them to breach their capital requirements. Most banks used a geopolitical shock to simulate the severe economic conditions that could cause this.
Military or economic conflict has become a growing concern for policymakers and financial institutions over the past few years. Any flare up between Russia and NATO, China and Taiwan, or Israel and Iran could draw in the United States and upset global trade.
When policymakers speak coyly about ‘geopolitical risks’ they are usually referring to some sort of fight between the United States and China, whether direct or indirect.
NZ First MP Mark Patterson, who is also a junior minister, offered a hint as to how some in the Coalition Government might view the new Trump administration behind closed doors.
He told the RBNZ officials they were being too “sanguine” about the “extraordinary circumstances” facing the global economy.
“Even with the US fiscal situation, you’ve got $30 trillion dollars worth of debt, probably got a tariff regime not seen since the 1930s, and two hot wars in the Northern Hemisphere; are you sure we've got our heads around how these secondary effects are going to impact us,” Patterson asked.
RBNZ Governor Adrian Orr said central banks around the world were taking these risks very seriously and asking the financial sector to prepare for a possible shock.
“We have passed, and may never see again in our lifetimes, peak global trade,” he said. Open markets have been replaced with “tit for tat protectionism” and 1980s style industrial policy.
“That’s why we are doing these stress tests, to ask how that will impact our financial system, and that can take you to some dark corners. Our job is to make sure we are as resilient as possible to those dark corners,” Orr said.
56 Comments
Butter at $(NZ)10 for 500g is a sign that instability is already here.
Which is similar to shelf prices of NZ butter across Asia. But guess what? If the the price is too high, people don't buy it.
And Japan again, the in-quota tariff for butter is set at 35%. Why have we not heard shrieks of protest?
While true enough that is only a solution if a viable/affordable alternative is available....what does an economy do when it cannot afford a critical resource?
Not necessarily. Butter is not a staple in Asian countries, unlike Western nations. South-East Asia has butter alternatives for cooking.
"Butter is not a staple in Asian countries, unlike Western nations."
Two world wars and today's "health influencers" would disagree. ;-)
And - were I to be brutally frank - the evidence I have before me about how price sensitive the "butter vs other products" dynamic is, I'd say you're full of it. But I won't say that. I've no need too.
You think Asian people consume butter regularly in-home like Westerners? You can believe whatever you like.
This is an example of a butter alternative in Vietnam. It's not typically used like Westerners use butter on bread. And it's approx 60% cheaper than butter. https://www.tuongan.com.vn/en/san-pham/magarine-2.html
Japan has the most Western-like diet among Asian nations with an average annual per capita butter consumption in Japan of approx 198.4 grams.
Because we're being fed lies that wage demands, geopolitical risks, supply chains, etc. are driving up costs.
Meanwhile, corporations all over the world have been raking it in since Covid.
Even Cindy and Robbo, who many here label as communist, were too chicken to pick up the phone and ask the likes of Briscoes to pay back the millions in taxpayer-funded wage subsidy. Rather put extra tax burden on wage earners than risk upsetting the corporate overlords.
Market forces
big supermarkets overseas will buy more of a product, with more suppliers to choose from. So the suppliers have to sell for less.
In turn the supermarkets will have more competition and abe to sell more of a given product. So can accept a lower margin.
Nz is too small a country. The only way is to intro a large third super market chain and have powerful commerce laws.
"this was interesting Comparison suggests Aussie beef retailed in Japan is cheaper than in Australia - Beef Central"
Check the FX rate. The JPY is weak vs AUD
https://www.google.com/finance/quote/AUD-JPY?window=MAX
Also a consumer in Japan doesn't care about the price in Australia. They only care about alternatives in their local market. If Australian beef is too expensive, then they might buy:
1) fresh NZ beef,
2) fresh Brazilian beef
3) fresh Chinese beef
4) frozen beef (from wherever)
or buy another meat source that is cheaper / better value for money
1) fresh chicken
2) fresh pork
3) frozen chicken
4) frozen pork
or go without meat altogether.
My parents purchase Australian beef direct from supplier and it's generally 50% cheaper than local butchers or supermarkets. It's not the supplier processing that eats the margins, it seems to be the invididualised sale of it at retailers.
It might just be that the additional processing time that Japanese retailers have to do aren't baked into the wage of the worker, and their work philosophy is vastly different to Australia or New Zealand's.
We can buy Aussie beef here for less than NZ beef at the moment, but I'd imagine that's because of a surplus of beef available in that market.
Simple price discrimination. Australia has more inelastic demand (meat eating being more central to culture) and less competition in the Australian market (less imported meat and most of it comes from us). The same is true for NZ meat and dairy.
Whereas demand for meat in Japan is lower (and I’m guessing more elastic), plus more competition with imported meat.
Therefore, you can charge Australian consumers more for the same product
https://www.interest.co.nz/economy/127417/prime-minister-christopher-lu…
Paul Newfield said de-globalisation was making the word more complex but also creating anomalies which could be advantageous.
“For example, Longroad’s close relationships with US solar manufacturers meant it was well positioned when the Inflation Reduction Act came into force in the United States,” he said.
“At the same time Gurin (Infratil’s Asian renewables platform) was able to benefit from falling equipment prices from manufacturers who found themselves shut out of the US market”.
Great. It was overlooked but Luxo's visit to Jollibee in the Philippines created a positive impression in their media. Jollibee is fast food for the people. Far from fancy pants dining. That a head of state visited connects on many levels. What's more, Luxon will know the QSR industry is where the likes of Coca Cola and Pepsi excel.
Global central bankers warn that trade barriers will drive inflation by pushing up prices across the board.
They're just spooked by their own shadows. Once again, using Japan as an example, its tariff system also includes preferential rates for products from developing countries, allowing for lower or duty-free imports under its Generalized System of Preferences (GSP) and Economic Partnership Agreements (EPA) with specific countries.
The US can pick and choose who it wants. For ex, if Vietnam becomes a manufacturing source for the US, policy can be arranged accordingly.
They don't necessarily need 'Net Zero by Nature' beef from Aotearoa, which many US shoppers don't want to or can't pay for anyway.
It has been mentioned. But if ones compares the US economy in 1920-30 to now, you can see some quite significant differences.
Edit: for those that are interested and eschew 'the Generative AI experiment': Smoot–Hawley Tariff Act - lookup GATT afterwards.
Why would the RBNZ bother looking into this? They can't even work out things like "0.25% OCR might cause inflation" and "once 1.8% falls out in September we will be well under 3%". How can they possibly guess how big tariffs will be, whether they will be imposed on NZ, when they will be implemented, and whether it will cause inflation?
The bottom line is that Trump's talk about tariffs is about unwinding globalisation. He's essentially going against the big US corporations. But COVID taught any government that was paying attention that some work was required to shore up national resilience at times when trade and lines of supply came under pressure or were threatened. Unfortunately for us, our government seems suddenly to be deaf and blind, although at least NZF seem to recognise it was a significant cock up for the then Labour government to sit on it hands when the Marsden Point refinery was shut down.
It was the big US corporations that shifted their manufacturing jobs to place like China and Mexico. They were hunting for bigger profits by reducing labour costs. Something they couldn't do in the USA. It was a fundamental part of their 'free market' model. COVID demonstrated the flaw in that model as supply lines collapsed or the shipping companies took advantage and profited from the reduced shipping capacity.
It's not out of date Chris. companies are still looking for cheap and easy means to improve productivity as viewed by the bottom line. Profits rank above all else. It is a lazy approach. There are age old adages that hint to the consequences of giving others the tools to manufacture your products, but this is all ignored in the name of easy profits.
While Trump's call for tariffs might be misplaced by him trying to muscle China, and i suspect he doesn't understand them much at all, the end result will be US companies having to bring the production back home. Long term this will be good for US employment, independence and resilience. It won't be so great for international relationships, with a lot of other implications. He will come under a lot of pressure from US companies to not do it further, whether he caves or not is yet to be seen. It may not be that great for US exports as stuff manufactured in the US will be dearer, as a general rule, than stuff manufactured in China or India and quality will become a defining differential (again).
it was a significant cock up for the then Labour government to sit on it hands when the Marsden Point refinery was shut down.
Maybe, but it was a private business, making their own decisions based on their interests. Maybe the cock up actually came when we privatised something that should be deemed critical national infrastructure.
When we took the easy cash up front we lost the right to make decisions on its use. This is not the Labour Governments fault, this was exactly the outcome we wanted when we decided to walk away from ownership.
In principle i agree with you. But I would also suggest that when private business's act in a way that places national security at risk, then it is incumbent on the government to prevent that. Fuel security is a nationally significant strategic need for any nation, this is where you are correct in saying it should never have been privatised, but that privatisation should only ever have been conditional.
Don't be surprised if the EU does the same with American-made goods.
BBC: China hits back at Trump with tariffs on $60bn of US goods, 19 September 2018
China has hit back at President Donald Trump by announcing new trade tariffs on $60bn of US goods.
It comes after the US slapped duties on $200bn of Chinese imports to take effect from next Monday, escalating its trade war with Beijing.
China will target goods such as liquefied natural gas, produced in states loyal to the US president.
However, in a tweet, Mr Trump warned Beijing against seeking to influence the upcoming US midterm elections.
"There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!" he said.
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