Views from the other side and secondary tariffs

This is the fourth article in my series about world trade and the impact of Trump tariffs on New Zealand (NZ) exporters and importers. To see the earlier three articles, please click here.

In this article, I cover:

• The Canadian view and response
• The US view
• Secondary tariffs
• China update

Grounded in America

If Air NZ had kept to their schedule, I would now be back in NZ after spending three weeks in Canada and the United States (USA). However, Air NZ are treating passengers like mushrooms, and so after two cancelled flights, I am still stuck in a cheap airport hotel in New York waiting for them to let us know when they might get us back home.

During my North America sojourn, I was in six different cities and had several conversations with Canadians and Americans on the trade issue. These included people in favour of and against the policies now being implemented. What I will say is that the conversations, whilst sometimes a little heated, were generally respectful to both views.

Broadly, this is my summary and thoughts about the impact on NZ from the other side.

Canada pushes back

Canada and the USA are on the brink of an all-out trade war. The newly elected Prime Minster of Canada, Mark Carney (who would not have been elected if not for the suggestion that Canada becomes the 51^st state of the USA and the threat of tariffs) has made it very clear they will not be bullied into accepting high tariffs without putting equal measures on imports from USA and “protecting our workers, businesses and communities.”

As far as I have observed, this is the only country forcefully and publicly fighting back. Trump’s response is, ‘Whatever tariff Canada imposes, we will add 35% more.’ Threats of escalation do not end well for either Canada or the USA.

This is risky for Canada. They are steering down the tunnel of 35% tariffs on exports to their largest, by far, export market and being threatened with 50%+ on copper, potash and other minerals, and 200% on pharmaceuticals.

But the general view from Canadians now is, ‘the boy who called wolf once too many times.’ They are blasé about the threats and don’t believe they will come to pass. Notably, they were surprised Canada buckled so quickly on the so-called ‘digital tax.’ But equally, they believe if the USA does go ahead with the threats of high tariffs, it will be reinstated.

Canada has some bargaining power that other nations don’t. Alaska oil currently passes through Canada, parts of the USA receive their electricity from Canada, and the USA car industry relies on parts from Canadian companies, to name a few. Companies like Amazon are hugely popular in Canada, so the digital tax would be significant.

Competition on the horizon?

In the meantime, both the Canadian government and exporters are opening new channels and communications, particularly with the EU (European Union), with some officials stating the EU is their friend and the USA their foe. Canada is unlikely to open the markets the USA is demanding, including pork, eggs and dairy (which is subsidised on a large scale via their ‘adjustment for support price’) on a scale similar to what NZ had in place in the early 1980s. Some readers will be of an age to remember SMP (supplementary minimum price) regimes in NZ pre-Rogernomics and how that impacted prices, supply, and generally poor investment of capital.

For NZ exporters and importers dealing with Canada, this is a very uncertain time. Common sense may prevail, and both countries might be able to arrange a deal, but that looks far away at present. I have set out in the previous articles some actions you might want to take to reduce the impact on NZ importers and exporters.

One of the main issues is that Canada has a large agricultural economy and produces significant amounts of the same primary products NZ does. So, as they turn away from the USA, they must find other markets for those products. And those markets are likely to be ones where NZ exports to. Expect significant increased competition if you are exporting primary products.

America divided

From the USA side, some refer to the agreements now reached with around a dozen nations involving tariffs of 25 to 35%. Those supporting Trump’s policies argue this is proof that Trump was right. ‘Why else would they accept these levels?’ is the general mantra. Those not supporting Trump argue that when the loaded gun is next to your head, you will agree to anything.

At this point, the inflation impact on the USA consumer is not readily evident. Although I did see some car yards with big ads stating they still had pre-tariff stock to encourage consumers to act now. If commentators are correct, consumers should expect car prices to increase by 25-35% once the tariffs take full effect.

Several commentators suggest the impact on the average American household is US$4k pa. That impact is yet to be realised to any great extent. But if that is correct, the combined issue of higher prices and inflation will reduce USA domestic demand and exporters need to be prepared for this fall off.

Secondary tariffs for Russia

This is a new matter causing some consternation with USA importers. Trump is proposing to impose a 100% tariff rate on countries that trade with Russia. His original target appears to have been the BRICS countries (Brazil, Russia, Indonesia, China, South Africa)

That quickly changed to those who purchased Russian oil. The reason is that some EU nations are still using Russian gas as a source for electricity.

The rate would impact India, Turkey, and China the most as they continue to purchase Russian oil and have considerable exports to the USA.

It is likely that the secondary tariffs would not be implemented if the Ukraine invasion by Russia ceased. Russia and Ukraine have 90 days to agree to a ceasefire, so now this is a waiting game. And should the 90-day period pass without a ceasefire, the question then becomes: was the 100% tariff real, or another case of the boy who called wolf?

What’s happening with China

As a quick update, exports by China to the USA have now dropped just over 6% year on year. They are expected to continue to fall. Notably, the countries that have agreed on an arrangement with the USA have a sting in the tail. Tariffs at the full rate would continue for transit goods.

This is aimed squarely at China, which was using Cambodia and Vietnam to ‘re-export’ goods manufactured in China to avoid the China-US tariffs.

China is now accused of ‘dumping’ (refer to my last article on dumping) in Thailand, Vietnam, and Malaysia as it attempts to recover cash flow and at least cover the marginal costs. NZ must be very wary about dumping, which might well occur in NZ and Australia.

In the meantime, exporters must be cautious about the financial well-being of Asian importers and should use either prepayments or LC arrangements to protect themselves.