By David Hargreaves
Reserve Bank Governor Graeme Wheeler is worried about the potential impact of the new Trump administration.
He's apparently so concerned about this, that he's taken the most unusual step (for him) of giving a public interview just a day before he's going to give a speech on the matter tomorrow (Thursday).
The New Zealand dollar, which has hovered around or above the US72c mark for the past week has dropped sharply, by about three-quarters of a cent today to US71.5c.
Wheeler, who is to stand down later this year when his five-year term ends, has been interviewed only infrequently in his term as Governor, and gave just two on-the-record public speeches last year.
Wheeler's speech tomorrow is titled: "Some thoughts on the balance of risks around the Reserve Bank’s monetary policy setting."
In an interview with veteran political journalist Richard Harmon, Wheeler gave an advance preview of the content of the speech, by saying that the greatest source of uncertainty for New Zealand concerns the new Trump Administration's ‘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," Harmon reports Wheeler as saying.
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.
“Such an increase could have a major impact, especially on the countries introducing these restrictions: their GDP could fall by 2% to 3%; imports by 5% to 10%, and exports by 10% to 15%, with the US the worst affected.
"And the rest of the world would suffer too from falling GDP, imports, and exports."
Wheeler says that as far as NZ is concerned, 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."
11 Comments
The rise of economic nationalism was inevitable and will continue so Wheeler and co need to get with it, without doing the doom and gloom scenario talk. From New Zealand's point of view I see it as a good thing, at the very least better than the TPP approaches we were to be inflicted with. TPP etc was a 'Clayton' idea. 'Free trade when you weren't going to be having free trade'. We were going to give away lots, without gaining much.
New Zealand needs to realise it's a very nasty world out there, and we should be making policy in our interest.
The real problem is naive politicians buying into economic theory without fully understanding the whole picture. Globalisation did all the damage, which also opened the door to Trump and Brexit because idiots in charge of the country were too enamoured of their own opinion to listen and learn from the real world. The current crop is just as bad. The ones who can see the reality are on the outer as their message, no matter how true, remains largely unpalatable.
For many, the question is whether WTO membership was the key to China’s miracle. If it was, then what about the other part, where especially US goods were by all expectations supposed to obtain access to the vast Chinese marketplace? If you remember much about the late 1990’s, growth talk at that time was not just about dot-coms as it often centered on which company, tech or traditional, might be best positioned to take off once China was “opened.”
Without examining too harshly, you can appreciate why some might be upset about this particular moment in time. For China, after the WTO it was the best of times; for countries like the United States, not so much. Donald Trump made it a campaign theme often, including remarks during his major “economic” speech given to the New York Economic Club in September last year:
Finally, comes trade – the foundation for everything. America’s annual trade deficit with the world is now nearly $800 a billion a year – an enormous drag on growth. Between World War II and the year 2000, the United States averaged a 3.5% growth rate. But, after China joined the World Trade Organization, our average growth rate has been reduced to only 2 percent.
There is clearly cherrypicking in the data, as the 2% figure is most heavily influenced by 2008 and after. Still, Trump was not wrong then to point out America’s misfortunes in the 21st century. Economists refuse to cite the data, but the BLS producing estimates that show clearly “something” has gone disastrously wrong since around the year 2000.
For the first time, a major politician, now actually President, has decided to forgo the mainstream, orthodox Economics excuse of demographics or whatever other passive absurdity has been offered in place of insight. There has been something wrong with the American economy, and while it has been most disturbed in the past decade we should not ignore the precursor warnings in the 2000’s. Read more
Hmm Wheeler certainly has an excellent model for the effects of protectionism .. espec from a major International player like the USA.
One just needs to look back at the 1930s, the knee jerk reaction of The USA after the 29 crash. The following international chaos would never have been any where as bad If they had not gone into protectionist mode.
As it happens, the countries least (but still severely effected) where the British Commonwealth and Empire members where trade agreements between them limited to a certain extent the fall out..
One must also note the similarities between the political propaganda of the US government leadership back then and Trump today... which not only include protectionism but isolationist policies.
There are many other historical examples going back to at least the 1870s.
Is it not the responsibility of the Reserve Bank Governor to recognise and comunicate such real possibles, espec those that have had serious historical consequences in the past.?
Dont forget Donald trump wants a greater Nato spending. Even though we are not Nato - we will be expected to spend more in proportion to our gdp on toys for the military (1.4% rising to 2% gdp). So we going to have to buy a few more boats and planes instead of hospitals and schools.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.