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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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24 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 but 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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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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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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"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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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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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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