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After saying he would prefer not to have to impose and post tariffs on China, Donald Trump hasn't posed tariffs on Mexico, Canada, and China. China came out the best of the three with a ten percent rate on all imports, while Mexico and Canada with a twenty five rate across most imports. This will likely mean an increase in prices for US customers, but maybe there's some potential for New Zealand to also step up it's explores and fill the void.
I don't know. We'll find out right now because Westpac's chief economist Kelly Erekhold is with me now and Kelly, good afternoon.
Good afternoon.
So is this the start of a trade war? Fast moving feast, doesn't it?
It is very fast moving, been pretty well signaled, and it does seem like we're going to have a good few months of t for tat going on in the space as all sides work out where they want to end up.
What does it mean for New Zealand? I guess let's start with exporters. Are there opportunities that come out of this or is it all bad news?
Well, I think it's probably bad news in general, if only because of the increased degree of uncertainty that there is out there the movement. The actions that the US has announced today are probably just the start of a broader campaign. You're highlighting Canada, China, and Mexico because those are the three biggest trading partners of the United States.
The European Union is probably next on the block, and it's probably a case of needing to work their way down their list of priorities in terms of working out what happens next.
Yeah, because I did see an opinion piece saying that maybe if it's more expensive to buy goods from Mexico than we could fill that void. But that's ignoring, that's pretending that nothing else happens, isn't it.
Well it is. I mean, keeping in mind that our biggest bought items are things like dairy meat in sort of white wall logs, etc. I mean, the goods that aren't going to go as easily into the United States now are probably going to go into other markets, and those are likely markets that will also be selling into as well. So I mean there is a bit of an issue of competition there. And I'll also say is there's probably a few exporters in New Zealand that are
probably getting caught up with this. You know, for example, Fisher and Pipel has manufacturing facilities in China and Mexico for servicing that US market.
What about consumers and in terms of the availability of goods, does it mean that we might be able to get things cheaper because there's less demand elsewhere?
Well, there certainly could better case, But I think the thing I'd highlight is that the exchange rates are unlikely to remain unchanged here in the face of this. In Trump's first imustration when he did tariffs, what tended to happen is the US dollar appreciated to mean that the actual net impact on US consumers of the tariffs is pretty modest. But correspondingly, that means that it hits usked because it costs US more.
What did you think of, Look, this is a slightly trivial sort of taken, but what did you make of Canadian politician Christia Freeland said there should be one hundred percent tariff on all US wine, beer and spirits and teslas.
Yeah, I mean, it's a brave cool I mean, obviously it could be advisable to turn down the temperature rather than increase it at this stage. It is possibly a bit cheeky as well. You might be aware that China Canada has its own issues with trade restrictions. They limit the ability of US and New Zealand dairy products to go into Canada because they have quotas. So you know, there's a bit of pot calling the kettle black here to some extent because.
They already have some tariffs on EU these from China as well as and some teslas that are made in China. Isn't that right?
I think in the United States?
Sorry, Canada has tariffs already.
Well, that's right because the Canadian one of their big exported industries, including to the US, is actually cut so they're very much a competitor in that space.
Okay, So some of the commentary is that it's going to be inflationary for the US. How does that have a does it have a knock on effect here? And what will our Reserve Bank be watching for regarding its own monetary policy?
Yeah? Well, last week, obviously, the Federal Reserve stopped cutting interest rates and citing, amongst other factors, the uncertain air in this space. So the implication is that you know, this is not going to be deflationary or disinflationing for the state. So that means higher interest rates the air, which has knock on effects effects to our own interest rates, but also the exchange rate. The Zero Bank will be
looking at that. They'll be looking at to see what the extent to which the New Zealand dollar goes down much further. It's already fallen quite a lot in the last sort of three or four months. We're down about, you know, eleven percent against the US dolescence start of October, and that will be figuring into their minds in terms
of their headlining. Flash is going to go. But as you pointed out, you know, there could be a few cheaper evs and manufactured goods get our way to the extent to which especially these China tariffs get increased.
As a bank economist, what are the things that you have your eye on most with these things? In terms of the advice that your employer are seeking from you, I think that the.
Thing that well, my employer asks me basically to provide good advice to our customers, and you know, so that's that's where I've been sort of trying to advise customers to be a bit careful, particularly around the exchange rate. There has been a tendency, I think in the last few years to people focus a lot on interest rate trends, both down and then up and then down more recently.
But with these sorts of shocks, they're more complicated, and actually it might look more like some of the situations we had in the late nineties and early two thousands, where more of the adjustment to these shocks comes through the exchange rate, and that matters a lot for exporters and importers because you can potentially use hedge and techniques and to prepare for some of these things, or at least a lady impacts, you've got time to adjust well.
Actually, imagine anyone who's planning any overseas travel there as will have pricked up. What are the concerns they might have? Does it mean that they're better to get there? And no specific financial advice obviously, but in terms of exchange rates, are going to be bad for the New Zealand dollar or.
Good, Well, it's probably going to be bad. It has already been bad. As I mentioned that Zealand dollar has already fallen quite a bit against many countries, so that has got to be a consideration for anybody thinking about, you know, whether they need to buy something in foreign exchange and the next six to twelve months.
And lucky last question, I guess on that cash rate question, most of the predictions I hear are people who are expecting a point five percent cut in the cash rate with the Reserve Bank. Does any of this put that those sorts of cuts at risk? Do you think with what we're seeing?
You know, I think the Reserve Bank was fairly settled on this next fifty basis point cut next month. And you may remember before Christmas as well, we learned that the economy had been particularly weak through the middle of last year. So I mean, I think it's most including ourselves, are comfortable with the idea that will get that fifty point cut. Where I think things matter with some of
these sort of shops is what happens after that. You know, the Reserve Bank had indicated that perhaps they might have scope to get interest rates down towards three percent over the course of the next couple of years. Perhaps that might not be so likely if, for example, the new Zealand Dollar Force A.
Long way, Okay, I really appreciate your time to say Kelly, thanks so much. That's Kelly Echold. He's chief economist at Westpac.
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