Yelda. I'm Chelsea Daniels and this is a bonus episode of The Front Page, a daily podcast presented by The New Zealand Herald. A week after announcing his Liberation Day tariffs and causing global market chaos, US President Donald Trump has done a one eighty. He has announced on social media that he has paused tariffs against seventy five countries for ninety days, but has doubled down on a trade wark with China, announcing a one hundred and twenty five
percent tariff on goods from the country. US stocks rocketed higher after the declaration. The S and P five hundred posted its best day since two thousand and eight, the Nasdaq its best day.
Since two thousand and one.
So what's behind the sudden backtrack and what could all of this mean for New Zealand?
Today?
On the Front Page, Where's Your Waned once again by Nsitt Herald Business Editor at Large, Liam Dan.
Liam, we only caught.
Up with you a few days ago on tariffs, and here we are again. Did you expect there would be such a backtrack so quickly? And what do you think motivated this decision?
Well, I've given up expecting or not expecting things out of the current scenario then the current US president, so anything was possible, and it was never clear to what
extent these tariffs were a negotiating tactic. There was a lot of messaging from the White House that they were dead serious, but really what's happened is he's had to backtrack, except for China so far because of the financial market reaction and not so much just the share market sell off, which was bad enough, but what we've seen in bond markets in the last twenty four hours seems to be the real reason that they've backed down.
Right, So when we're all looking at share markets and looking at the SMP and the NASDA and everything, what was happening with bonds.
In the wake of the initial announcement. There was so much fear that we're heading into a recession and things that the bond yields actually fell that the standard model was that when we say bond yields, we're talking about effectively the interest rate on debt. So bonds are a product that is effectively sold, is that they're the debt market. The bond market is the debt market for the world. There's a something crazy like one hundred and thirty trillion
US dollars of debt in the world. The world runs on debt, and these bond markets are widely considered to be the most powerful political force in the world. They're the thing that can stop presidents in their tracks. They effectively force the resignation of the UK Prime Minister is Trusts when she sort of unveiled some economic policies which
didn't make sense to bond markets. So if you cop a serious reaction from bond markets, effectively a self a sell off of bonds, the price goes down, the yield goes up, and the cost of borrowing in your country starts to spy, and that is a big problem. You've reserved bank or your federal Reserve can come in and try and push back against that by cutting interest rates,
cutting the official cash rate. But effectively, if markets are saying that at the pricing a higher cost of borrowing, it just means everything slows down in your economy because you know, people can't afford to borrow to do things.
In a speech at the National Republican Congressional Committee President's dinner, Trump made some pretty scathing comments about his allies.
I'm telling you, these countries are calling us up kissing my ass.
They are dying to make it your.
Please, please make it your I'll do anything. I'll do anything, sir, Do we have to kiss his ass? Slam?
Well, there's two approaches. Some countries have decided that it's better to negotiat. I think New Zealand, having copped just the baseline ten percent tariff, as we're not retaliating, we're not really in that negotiating framework. I mean, we can talk about the ten percent, but that's going across all the countries, so it's not scific to New Zealand. We'll have our trade officials go and talk to them and say, hey, this is a bit weird and can we get some clarification.
But I don't think we're trying to negotiate in the same way say Japan would be trying to negotiate right now. We just have to wait and see what happens to the whole thing. But then the other tactic, as we've seen, is China has absolutely retaliated and we've got this you know, standoff that's got to a sort of I guess a mutually assured self destruction, you know, like kind of it's like a nuclear level standoff. Now between China and the US, and I suspect that in that case, both sides are
looking for a way to start talking. But both sides need to look like they're not backing down. So my hunch is that they're trying to find a way to get some talks going because it's not a sustainable position. It's disastrous for the US economy to have tariffs of whatever it is, one hundred and twenty five percent on Chinese goods, but it's also going to be a big problem for China. I would imagine something's going to have to move in the next few days.
Trump's top trade official, Jamieson Grea, was testifying before Congress when the ninety day pause was announced, and it doesn't seem like he knew about it.
When asked about it, he said, well, I understood the decision was made a few minutes ago.
Now this just confirms to us that these decisions seem to be made on the fly, doesn't it.
How dangerous is that?
It's very dangerous. I mean, Trump's playing a really high stakes game of poker with really the very notion of the US economy being that the primary or dominant economy in the world. So trust in the US economy is fundamental to their dollar being the primary currency for trading in the world, and to come back to them again
to the bond market. So when you have a big sell off of equities around the world, or if something bad happens COVID, you know whatever, US bonds are seen as the safe place you go there where you put your money to stay safe. Now, what's happened in the past couple of days is that we've seen US bonds sold off quite significantly, so that the bond yields have gone up. So it's just important to remember that there's this inverse relation between the bond price and the bond
yield or the interest rate on the bond. So I always think it's a bit like trying to back a trailer. I always have to stop and just get it right in my head each time, because it's not as straightforward an equation as it is for equity markets. But around the world countries have either been selling off bonds or just stopped buying them. There's a lot of talk about the fact that this could be done as a deliberate
retaliatory tactic. So China holds about a trillion dollars of American bonds, and if they were to start selling them rapidly, that would have a significant impact on the market. Now it's not clear whether they were, or maybe they are at some level, but there's probably a wider sell off going on. And the pace at which the yield was going up. It wasn't taking yields up to the highest we've seen them in the past year or two, but the pace at which the yield was rising was spooking
people in the US. There's a famous quote. It was Bill Clinton's economic advisor, James Claville. He was the guy who said it's the economy stupid, and they coined that phrase. But he once said, after a sort of probably much more mild crisis, that he used to think if he was reincarnated, he'd want to come back as a president or a pope to be powerful, But now he'd just rather come back as the bond market, because that's the
most powerful thing there is out there. They're not well understood, they're not a popular topic in the just the general world of the public, but underpinning everything, it's that debt and the price of debt that keeps our economy functioning and flowing and so to sort of blow up the established world order on that is a very high stakes game.
Indeed, and you mentioned Liz Trust before as well. Is it true that so the bond market it can't lie right? So you look back in twenty twenty one when Liz Trust's tax cut policy tanked the markets and she had to backtrack and eventually resign ultimately the markets in the bond market in particular, does that make or break these policies?
Yeah, look at will do. I mean, sheer markets possibly could. But you can sort of wear a shear market crash because you know, you can say, oh, well it's paper money. You know, we've we've lost so many trillion, but it might come back next month. With the bond yields rising to a certain point, there's a real world effect of seizing up financial markets like we saw in the GFC. You know, you just if the overnight borrowing rates go through the roof, that the whole system can seize up.
Come it's less forgiving, Yeah.
Because companies that thought they had an okay amount of debt to carry on suddenly find out that the amount of debt they've got is too big. With these new higher interest rates, and you know, in the GFC that meant that some banks, big banks started falling over, so you know, and then you've got a global financial crisis. So I guess what we're saying is that there's a risk if this all spirals, that you get another global financial crisis. And I don't think even Donald Trump has
the stomach for that. And that's probably what's forced this partial back down and hopefully some sort of resolution in the near future with the China standof.
And is that why we should be looking at the bond markets not the share markets, because there have been some record days for the share markets and people would be looking at that thinking that's surely a good sign, right, Yeah.
I mean it's very reactive the share market, so it came off a lot. People don't have clear signals, you know, you can't predict what's going to happen, what's going to come out of the White House. So the share markets are very erratic, very volatile. They have bounced a lot
this morning that there's still in correction territory. They've bounced back from around twenty percent losses this year to sort of being I don't know, probably still down about ten or twelve percent a lot of the share markets this year, so it's still not been a great run. I guess share market investors are hoping that we're back from the brink. I mean, addedly, it's just a ninety day pause, so
it doesn't make the uncertainty go away. Perhaps you could argue that this is all a softening, you know, to get to where Trump wants to be with a new world Order of tariffs. You go through this turmoil and wherever we land is a bit soft and slowly the will gets used to the idea of what's coming, and markets priced in, and he lands somewhere that's not quite so terrifying. But yeah, I think it is the bond market that's really going to decide it, and that's where we should be looking.
China, of course, remains Trump's main target. He said that the increased tariffs there are because of a lack.
Of respect Beijing has shown.
Will the measures against China have a trickle down effect for New Zealand and others?
How will that affect us?
Yeah? So if this really does play out, if these tariffs stay in place, it's going to be bad news for the Chinese economy. It's going to cost them as well, so that will affect growth. Now you get into a game of who can take the most pain and who's got the most ability to sort of maybe stimulate their economy through that, you could have you know, central banks on both sides sort of unleashing stimulus like they did during COVID. That's not great long term, but in the
short term. Yeah, the expectation is that it's quite serious for the global economy and probably quite serious then for New Zealand's recovery. It's a headwind. It slows that. I think the Finance Minister's called it a significant event. She's obviously weary of calling it a crisis at this point.
Yesterday we had the Reserve Bank cutting the official cash rate by the sort of two twenty five basis points, which was what was already planned, but the tone was that they could go further and they'd be ready to go further if things go bad for the economy. So that could mean that we see the official cash rate go lower than expected. Here, I mean's lower mortgage rates
to try and try and offset the downside. And then you know, the other part of any stimulus or help that you could get for the New Zealand economy would be the government part, and that's where the Finance Minister has so far tried to say, look, no, we're holding the course. The budget's the same, we're still trying to get out of deficit, get the books into surplus on the same pathway, but also saying she's not prepared to
do more cuts. But if the numbers don't add up, if the New Zealand economy, if the growth is slower, the tax and you will be lower and the government could face some hard choices. So it may be that if this spirals and the budget's sort of almost written now, but there could be some emergency revisions to the budget, they may have to relax their fiscal constraints and allow
a bit more government money into the economy. It's not certain yet, but if things keep turning in a negative fashion, then that is an option for the government as well. I mean, they're wary of borrowing more to do that. But then you'd have to look at it in the context of a world where probably governments around the world are having to do this sort of thing.
And Trump has said China wants to make a deal, they just don't know how quite to go about it. What could he mean here? And what deal could China possibly bargain? Do they need to?
Well, this is what I mean about. I think there's a lot of saving face here on both sides. Trump says it as if it's just China's issue, but I think America is quite quite keen to make a deal too, was hoping that they would make a deal. And China's the second biggest economy in the world. It sees what these you know, sees this tariff policy as an attack on itself, and so it's standing up and yeah, look, it is a bit like a sort of a Cold
war nuclear moment. You take it to the brink, and then at some point, you know, you just hope that
there is going to be a way there. You know, both both leaders and both countries will say, oh no, we've got the other sides back down, But there has to be a way for them to both save face with their own public and get to the negotiation table and dial it back to something that is manageable, because you know, at the moment, you know, those kind of tariffs when you consider the complexity of the trading relationships and the manufacturing relationships on everything from iPhones to cars
and just all the goods that are connected between China and the US. It would be a disaster and really inflationary for both economies.
Thanks for joining us, Liam, Yeah, thank you.
That's it for this episode of the Front Page. You can read more about today's stories and extensive news coverage at enzedherld dot co dot enz.
The Front Page is produced by Ethan.
Sills and Richard Martin, who is also a sound engineer.
I'm Chelsea Daniels.
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