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18 Sep 2019

How the Trade War Affects NZ

As the US-China trade war continues to intensify, New Zealand is left wondering how it will be affected. As the first member of the Organization for Economic Cooperation and Development (OECD) to sign a free-trade agreement with China in 2008, New Zealand has become somewhat dependent on the Asian giant. From dairy and agricultural products through to timber and tourism, roughly 20% of New Zealand's exports head to China.

The United States recently announced new 15% tariffs on US$112 billion of Chinese goods, with China starting to impose 5% and 10% tariffs on another US$75 billion worth of US goods. Two-thirds of US consumer goods imported from China are now subject to tariffs, with all Chinese goods set to be subject to tariffs by the end of 2019. The uncertain and ever-changing nature of the trade war is having a significant effect on global markets, with domestic consumer confidence and jobs figures also taking a hit in the United States.

According to leading economist Cameron Bagrie, it's a not a question of "if" New Zealand will be affected by this escalating trade war, but "when". Export numbers for July were already down 6% on the previous year, with renewed tariffs over recent weeks only likely to make the situation worse. Along with the acute impacts being felt in agricultural and tourism sectors, weakening global trade conditions will also have a huge effect on the small New Zealand economy.

In a recent interview with Nikkei, New Zealand Finance Minister Grant Robertson said: "We are a small country of 5 million people... And New Zealand is a small, open economy and we rely on what happens in the rest of the world." Along with specific exports and tourism numbers declining, the trade war continues to adversely affect global trade patterns. While no-one is immune to global trading system distortions, small economies like New Zealand often have less insulation from the storm.

According to Bagrie, the trade war is one of the main reasons New Zealand airlines started lowering inbound prices, with tourism numbers likely to start dropping from 2020 unless a resolution is found. Consumers and business owners in some sectors are already feeling the pressure, with a drop in the latest ANZ Business Confidence Outlook Survey recorded and more companies expecting to cut jobs over recent months. While the spill-over is not likely to threaten New Zealand's core strength, it does highlight a growing need to diversify trade partners.

The Regional Comprehensive Economic Partnership is currently under negotiation, with this new 16 country pact hoping to be underway by the end of the year. According to Robertson, "It's clearly got lots of challenges but we continue to be committed to trying to make it work." The New Zealand economy is expected to grow by 2.4% this financial year, which is a reduction from the 3.2% recorded the year before. It's not all about growth, however, with the new "Wellbeing Budget" set to focus on broad social issues like mental health and child welfare in order to broaden the definition of New Zealand's success.