Trade wars: what next for NZ?
By Bruce McLachlan, Chief Executive
12 March, 2018
Economics 101 is a first year course that many University students have to suffer and endure. The course is a prerequisite for many Business degree courses, whether interested in Economics or not. In my time, the subject matter was mostly very dry, and subsequently many of the concepts have been outdated by the impact of technology and a better understanding of human behaviour. Some economic principles are changing, but some have also endured.
One of the most basic principles that has endured is that free trade lifts the incomes of all participants. If resources are directed to the most efficient producers then everyone wins, notwithstanding some fallout during the change process of reaching that point.
Despite the unequivocal nature of the free trade principle, getting countries around the world to agree and implement free trade policies has been a long drawn out process. Countries have been getting there however, as shown by the continued proliferation of new free trade agreements.
Recent moves by the president of the USA to implement tariffs on steel and aluminium imports into the USA is a significant step against this progress and could be a first step in more significant trade barriers being implemented globally. The first losers will be US consumers who will end up paying a higher price for products containing steel and aluminium. The second losers will be alternative industries in the USA who feel the retaliation from other countries. Already Europe is threatening tariffs on Jim Beam Whiskey and Harley Davidson motorcycles in retaliation! The third losers will be countries more dependent upon trade than the USA.
The interesting fact is that the US produced less than 5% of world steel production in 2016, and less than 2% of world aluminium production. This shows it is not as if the President's actions are designed to protect large volumes of domestic jobs in the USA. This proposal has political motives and potentially far greater ramifications.
The underlying problem is that the US trade deficit widened to $56b in January 2018, the widest this gap has been for 10 years. The US does have a significant structural problem, however there are very few commentators that believe that tariffs on selected products and a potential trade war are the answer to the problem.
Why should we even be bothered by these changes? Exports make up nearly 30% of New Zealand's annual $250b GDP and so for all of us our livelihoods are dependent upon New Zealand being able to trade with the world. Many of our better companies listed on the stock exchange are dependent on exports. In a world of increasing tariffs and reduced trade New Zealanders incomes will fall.
It is way too early to predict where this may all lead to, but let's all hope common sense and reflections on first year university courses prevail.
On 5th March Sir John Wells retired as Chairman of Fisher Funds. Sir John has been on the Board a total of 18 years, and has overseen the success of the company over that time. All of us at Fisher Funds wish Sir John well for the future. The new Chairman is existing Non-Executive Director David Clarke. David has been on the Board two years and brings a wealth of experience in financial services in Australia and New Zealand to the position.