Trade watchers fear ripple effect

NZ farmers Weekly, Nigel Stirling

Professor Crawford Falconer hopes the United States and China can limit themselves to a couple of injurious blows to each other without starting a full-blown trade war.

Trade watchers are grappling with what Donald Trump’s America-first attitude will mean for New Zealand agricultural exports.

While his first-day executive order to withdraw from the Trans Pacific Partnership (TPP) grabbed headlines here the new president promised to shake up the world trade order with a number of similarly bold moves.

He moved quickly to prepare the ground for a re-negotiation of the Clinton-era North American Free Trade Agreement.

Ignoring years of effort to bring about a trade deal between the United States and Europe Trump is now eyeing up one with Britain and will meet British Prime Minister Theresa May this week.

He is also in talks with the Republican leadership in Congress to impose a new border tax on exports to the US while giving its own exporters tax breaks.

Trump is yet to instruct the US Treasury to declare China a currency manipulator as he promised to do on Day 1 of his presidency but a spokesman did not dismiss the idea and said the White House would make an announcement when it was ready.

Such a move would mean the US believed Beijing had deliberately and unfairly forced down its exchange rate to its exporters’ advantage and could give Trump the cover he needs to carry out his election pledge of a 45% tariff against imports from China.

Underpinning the Trump agenda is a mercantilist view of the world where importing countries lose out to exporting rivals and the score is kept by trade surpluses for the victors and deficits for the losers.

Critics say it ignores the reality of modern supply chains where a significant proportion of manufacturing output is imported and Trump’s plans could end up costing the US jobs if import prices are pushed up with new tariffs.

Confronted with hefty US tariffs on its exports Lincoln University professor of international trade and former ambassador for NZ to the World Trade Organisation, Crawford Falconer, says China would initially seek to be “seen to be playing by the rules” and challenge them through the WTO’s dispute settlement body.

“But they may well hurt the US in other ways. They would make it clear to US business that they would make it harder for them to do business. They have got lots of way they can do that.”

China could ease further or even completely abandon its peg to the US dollar, which, given global markets’ heightened nerves over the country’s indebtedness, would almost certainly accelerate the renminbi’s recent falls.

While that would help offset the cost to its exporters of US tariffs it would dent the buying power of Chinese consumers as well as the competitiveness of countries, such as NZ, selling to China.

If these tit-for-tat trade retaliations escalated into a full-blown trade war Falconer said global growth could take a hit.

That would wash up in NZ through lower global demand for commodities though he was hopeful the two heavyweights would pull back from the brink.

“Could the couple of them reach a sane plateau of a couple of injurious actions to each other and call it quits for a while to let the dust settle? One would hope so.”

More broadly Falconer feared a break-down in the consensus on trade that emerged after World War II and had remained in place since.

That saw countries progressively lower tariffs through multilateral negotiations such as the General Agreement on Tariffs and Trade and its successor the WTO’s Uruguay and Doha rounds as well as through regional trade deals like the TPP and bilateral ones of which Australia and NZ’s Closer Economic Relationship was a trailblazer.

Ditching that consensus is what the Government’s agricultural trade envoy Mike Petersen sees as the biggest threat to NZ from the Trump trade agenda.

“I am not overly concerned about NZ being dragged directly into a trade war between the US and China although there could be some spill-over effects.

“The area that really concerns me is the general theme of self-interest and inward-looking politics.

“We are seeing it everywhere and it is very much about favouring domestic over imported production and that is the thing that I am worried about spreading.”

Fonterra’s director of global stakeholder affairs Philip Turner is more hopeful.

While the dairy industry was smarting from Trump’s canning of TPP he said it stood fully behind any efforts to boost market access for US dairy exports if it meant others could benefit too.

“It is not clear at the moment how they are going to go about that except to say the traditional approach that has been tried to date they do not seem to be in favour of.

“We in the dairy industry for decades have had to deal with extremely protected markets in the rich as well as in the developing countries.

“If there are any ways of prising open those markets then we are all for it.”

Turner said the US was the world’s third largest dairy exporter and opening up markets through new trade deals could be a significant boost to global dairy trade.

“We want that to happen in a way that advantage is shared so that it doesn’t all go to the US and market access gains are shared around other trading partners.

“If the new administration can find ways to do that then good luck to them and we will certainly be talking to them to understand what their approach is going to be and how we can work together.”