Many commentators say Trump’s tariffs are a negotiating
tactic.
Hopefully, they are correct.
We have been told before that overseas events will not affect us.
When there were problems in the United States with sub-prime mortgages, a representative from the US Federal Reserve gave a seminar in Wellington.
He explained that sub-prime mortgages were less than 2% of all US mortgages and could not possibly affect the economy.
Sub-prime mortgages triggered the Global Financial Crisis (GFC) and a recession.
When the Thai currency collapsed, no one warned that the baht’s fall would cause the Asian Financial Crisis and a recession.
We have minimal trade with Ukraine, but Russia’s full-scale invasion of Ukraine increased our cost-of-living crisis.
The global economy is interconnected in ways we cannot model or predict. As a small, open economy, New Zealand will not escape.
If the Trump tariffs stay in place more than two months, the tariffs will almost certainly cause a global recession.
The claim that the tariffs are a negotiating tactic does not stand up to analysis. Lesotho, the 11th-poorest country, has a 50% tariff. The US cannot want Lesotho’s low-paid jobs making T-shirts.
What could Trump want from New Zealand? Our average tariff on US imports is 1.9%. No New Zealand Government will abandon Pharmac.
When politicians take illogical actions, commentators try to find a rational explanation. The crazier the action, the more likely there is no rational reason.
Trump believes tariffs mean “we’re going to become so rich, we’re not going to know where to spend that money”.
Completely nuts.
Trump has always wanted tariffs. Before China, Japan was the threat. Trump, then a property developer, is on record saying “I believe very strongly in tariffs”.
He is erratic and capable of spectacular U-turns. Great damage will be done before reality causes a correction. The Federal Reserve governor predicts that tariffs will boost inflation and make the economy poorer.
Nuking world trade must cause a global recession.
What should our Government’s response be? We cannot change Trump’s mind. Retaliation only hurts us. McClay is right. We must make the best of what opportunities arise.
Like many issues, our response should have started long ago.
Last year, Treasury warned: “New Zealand needs a healthy balance-sheet buffer … Shocks can rapidly increase debt.”
It was obvious Trump would win the presidency. On the campaign, Trump said he would impose tariffs using “every lawful power”.
US tariffs were always likely to start a trade war and a global recession.
We have had over a year’s notice.
A prudent Government would have been preparing for the Trump presidency by running a balanced budget and keeping debt low.
New Zealand was well positioned to respond to the Asian Crisis, the GFC and Covid because successive Governments balanced the Budget and kept debt low.
This was no accident. After the Muldoon Government’s reckless deficit spending and borrowing almost bankrupted the country, we MPs declared: “This must never happen again.”
With cross-party support, Parliament passed the Public Finance Act 1989 to make it the law that Governments must maintain a balanced Budget over the economic cycle.
Section 26G, principles of responsible fiscal management, mandates that the Government must reduce debt to prudent levels by spending less than it earns until prudent levels of debt are achieved.
In 2022, Auditor-General John Ryan recommended updating the Public Finance Act to ensure comprehensive fiscal responsibility.
When Nicola Willis became Finance Minister, she accused Labour of having broken the spirit of the Public Finance Act by leaving fiscal cliffs; policies that were implemented but not funded, such as school lunches.
The minister said the Government intended to look at amending the Public Finance Act.
Willis has forgotten her intention. This Government, too, has broken the requirements of the Public Finance Act by failing to set what is a prudent level of debt.
Spending, the deficit and debt have all increased.
Labour and National flouting the legal mandate of the Public Finance Act to run balanced Budgets and keep debt at a prudent level means New Zealand is very vulnerable.
The country is in the worst financial shape in 40 years to respond to a global recession.
Hoping to escape the global impact of Trump’s tariffs is not a strategy. Planning to cancel a few vanity projects is gesture economics.
The New Zealand Government must implement the legal requirements of the Public Finance Act by balancing the Budget and reducing debt to a prudent level.