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Reserve Bank officials say global inflation generated by President-elect Donald Trump's trade policies will be manageable but risks triggering a wider trade war. MP says RBNZ being 'too sanguine'

Economy / news
Reserve Bank officials say global inflation generated by President-elect Donald Trump's trade policies will be manageable but risks triggering a wider trade war. MP says RBNZ being 'too sanguine'
RBNZ Governor Adrian Orr speaks at the May 2023 Monetary Policy Statement
RBNZ Governor Adrian Orr speaks to media at the May 2023 Monetary Policy Statement

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.

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56 Comments

Financial stability?...a strong USD is bad for the rest of the world...what resources will remain available for those outside?

Butter at $(NZ)10 for 500g is a sign that instability is already here.

 

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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? 

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 "But guess what? If the the price is too high, people don't but(sic) it."

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?

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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. 

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"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.

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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. 

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"You think Asian people consume butter regularly in-home? "

Did I say that? No. I did not. I was challenging your words that implied it.

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Did I say that? No. I did not. I was challenging your words that implied it.

If it were a staple, it would be regularly consumed in the home. 

Per capita, NZrs consume 20x more per annum than Japanese. 

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Butter is an exemplar....and a NZ centric one as dairy is our largest export sector. There is no shortage of butter in NZ.

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Japan has a 35% tariff on beef imports. But Aussie beef is up to 35% cheaper for Japanese shoppers than for Aussie shoppers. 

Why is that?

This is not a trick question.  

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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.

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I'll give you 3/10 for that answer. Mainly for effort. 

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And there you will find the answer to my question. But my claim that the tariff is 35% is wrong. It was reduced in April. The import tariff on beef for CPTPP member countries, including Australia, is 22-23%. 

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I have family in Perth who can get Kapiti cheese around 20% cheaper than you can get it here in NZ at the Pakn'Save in Paraparaumu. Go figure

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Anything thats exported will not have GST plus bulk buying?

 

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wonder what the trade off is with the transport costs to there?????

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Surely the freight costs alone would outweigh the 5% difference in GST between the two countries?

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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.

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"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.

 

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Aussie beef is awful and not a threat to Japan's beef industry.

(More seriously ... for a market to be competitive, and drive price competition and product development, there must be at least 20 primary players.)

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Aussie beef is awful and not a threat to China's growing beef industry.

Pointless trolling

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It was meant as a joke. Sorry, not a good one. I've edited my comment above for the most likely reason.

(I'm in a whimsical mood today as my hedging of the US election worked out far better than I expected.)

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No problem. The Aussie beef industry is successful given the challenges. 

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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.

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It's not just retail. The integrated Japanese distribution network is next level. If you go back 20+ years, the same network had a reputation as being convoluted and high cost. It has adapted as a means for economic survival. 

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When I was in Korea 20 years ago, Aussie beef was much cheaper than Korean beef. The Koreans farms were much less efficient due to a shortage of non-mountainous land in Korea. I never did see a beef farm on hills like in NZ...

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Something is really going wrong in this country when you buy mince now at Pak n Save now and it has NZ/AUS on it. The day we need to start importing beef from Australia is the day we lost the plot.

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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

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"pushing up prices across the board" - will it? If China can't export to the US, demand for their goods drops and so does price?

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it is totally possible that NZ could benefit from the chaos 

read my story from Southeast Asia which talks a little about Kiwi buinesses benefiting from the fragmentation as they can slot into gaps left behind in the realignment 

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Do you have a link Dan?

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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”. 

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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.

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And yet another reason why Frontera selling its brands at this time is not a great idea. (fttdk (for those that don't know) ... the US has a dairy industry far, far bigger than ours ... And hugely subsidized too - 'national security' don't cha know.)

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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.  

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If you stare for long enough at dark corners you will start to see mythical things like inflation expectations, Ricardian equivalence, bond vigilantes controlling central banks, and Govts that borrow from China.

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No need to put in any such effort. 'Independent journalism' on social media will tell you what you need to know when the masters want you to know it. [humor. or is it?]

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An easy solution, should that bully and coward threaten NZ Inc with tariffs, would be for NZ to offer the Chinese a lease of land for a naval base. Anyone wanna bet he'll cave in short order? [humor]

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a stupid solution*

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"Talk quietly. But carry a big stick." 

First rule in international politics? ... Don't state the obvious. They know it already.

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Smoot–Hawley 2.0
1930s 
Deflation here we come

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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.

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Banks are generating significant profits from Kiwis, RBNZ is worried about Trump winning election.

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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?

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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.

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"He's essentially going against the big US corporations."

Say what?

No. He is not.

Please do explain why you think so.

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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. 

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Okay. I understand what your logic is based upon. Sadly, it is wrong. Hint: it is way out of date.

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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).

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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.

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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.

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RBNZ simply preparing everyone for no rate cuts

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This might be the time for Luxon and Willis to fill in the application form to join the BRICS.

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USA and NZ Fed/RBNZ rate dot plots have all tilted NORTH.  Grab the cheap DDDEBT dough, while you can.

The Good Ship NZ has to get ready for some very large swells!

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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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