| Opinion – by Conor English 5 February 2025 – Everyone has a plan until they get punched in the face – Boxer Mike Tyson famously said, “Everyone has a plan until they get punched in the face”. He was simply pointing out in his own unique direct way, that sometimes things don’t go the way you think. There can be unintended consequences. Your opponent can counter punch, so a “plan b” can be useful! The new USA government has a plan to use tariffs as a way of incentivising other countries to do things that are helpful to the USA. Things like curtail immigrants or drugs travelling over the border, or to shift their manufacturing jobs to America. The President has described the word “tariffs” as “the most beautiful word in the dictionary” so its clear he likes the idea of using tariffs. It does have some logic. Maybe this plan will work? So, using emergency powers that enable quick action, rather than long winded trade negotiation processes, this plan is being implemented this week. First up, 10% tariff on goods from China, and energy products from Canada. Tariffs will be set at 25% for most other goods from Canada and Mexico. If these countries change their drug, migration and manufacturing policies, the USA will look to review the tariff levels. That’s the new deal. New Zealand had its own tariffs for many years as was fashionable. But now we seek fair trade, with no tariffs or quotas, or other non-tariff trade barriers in our trading relationships. It matters to us as a small trading country at the bottom of the world. Multilateral co-operation and enforcement frameworks such as the World Trade Organisation are vital. America, like many countries, has a long history of using tariffs. An excellent example of how things can end up like a punch in the face, as Mike Tyson would put it, is the passing of what was known as the “Smoot Hawley” Tariff Act on June 17, 1930. This raised tariffs on over 20,000 imported goods, despite a petition signed by 1,028 economists asking President Hoover to veto the legislation. He didn’t. The theory was it would save jobs in America and protect local producers from international competition following the “Black Thursday” share market crash on October 24, 1929. But it didn’t make things better, it made things worse. Americas trading partners punched back. They didn’t do nothing. They retaliated, just as Canada and Mexico now have. The world economy and geopolitics has evolved significantly since the great depression and what happened then may not happen now. However, history can perhaps provide some small insight as to how this might play out. Wikipedia tells us that after the Smoot- Hawley passed – yes – USA imports did decrease by 66% from $4.4 billion in 1929, to $1.5 billion in 1933. So that must be good for domestic jobs and industries? Well no, because other countries punched back with their own tariffs, as well as sourcing their own imports from other countries rather than America. As a result, USA exports also decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1 billion in 1929 to $75.8 billion in 1931, bottoming out at $55.6 billion in 1933, a drop of around 50% over four years. So rather than create jobs, jobs were lost, and plenty of them. Unemployment was at 8% in 1930 when the Smoot–Hawley Tariff Act was passed, but the new law failed to lower it. The unemployment rate jumped to 16% in 1931, and 25% in 1932–33. The factories that produced those export goods couldn’t sell their products, so staff lost their jobs. Unemployment didn’t fall below early 1930s levels until the massive economic stimulus of World War 2. As with any economy, there is always more than just one thing happening, but at that time, that is what happened in the USA. So how does this current fast changing situation effect New Zealand? Unlike 100 years ago, we get impacted very quickly by the transmission of changes in our exchange rate, interest rates, commodity prices, share markets and trade flows. This then flows through our economy. For example, if inflation goes up in America because of the new tariffs, international interest rates may go up, thus reducing the speed of any reductions on our mortgage rates. Dairy commodity prices might rise, but so too might international oil prices, pushing up our fuel prices and inflation. Our dollar may fall, making it cheaper for tourists to visit, but the cost of servicing our increasing national debt more expensive. Chinese built EVs may be more available and cheaper here as cars are diverted from the USA market. There will be all sorts of positive and negative impacts, unintended consequences and unforeseen outcomes. It could be overall positive or overall negative for both America and New Zealand, but we just don’t know. We do know though that it creates more uncertainty, and that’s not helpful to anyone. So will it be a punch in the face, as Mike Tyson suggests, or a pat on the back? Either way, we need to be fleet of foot and have a “Plan B”. Conor English is a Director of Silvereye – a Wellington based Government relations firm, a former exporter, CEO of Federated Farmers, and Independent Advisor to the Reserve Bank of New Zealand. |