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| Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz | ||||||||||||
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President Trump’s ‘Liberation Day’ trade tariffs are a disaster for America and the world. In the name of “fairness” and “balancing trade,” the United States is slapping double-digit tariffs on all imports (except from Russia, Belarus, North Korea and Cuba!). This week, the administration paused most of them for 90 days – though it raised tariffs on Chinese goods to 125 percent. The logic? If America buys more from a country than it sells to it, that must be unfair. So, tax the imports to even things out. But that is not how trade works. It has never been. Countries run trade deficits and surpluses with each other for many reasons. Some make certain products more efficiently. Others consume more than they produce. And some just have a taste for specific goods – like Scottish whisky, Korean phones and Japanese cars. Trying to equalise every trade relationship through tariffs is like trying to make every household earn exactly what it spends at each shop. It is nonsense. Worse, it is damaging. Maurice Obstfeld, a former IMF Chief Economist, recently pointed out that these tariffs will hit Americans hardest – and they still might, if reintroduced after the 90-day pause. The Trump administration is taxing imports in precisely the areas in which the US economy gains the most – like cheap inputs for manufacturing or products no longer made domestically. The result will be higher prices, less choice and less prosperity. It is economic self-sabotage dressed up as patriotism. The temporary suspension is a welcome reprieve. Markets rallied, and businesses breathed a sigh of relief. But the underlying strategy has not changed – and neither has the threat. The administration’s decision to hike tariffs on Chinese imports to punitive levels shows that this trade war is far from over. Tariffs, especially those set under emergency powers, also create a climate of uncertainty. Businesses struggle to plan when trade policy changes randomly. Investment slows. Supply chains are disrupted. Jobs are lost. And for what? A dogmatic crusade against trade balances that do not need fixing in the first place. But here is the good news: the rest of the world does not have to follow America’s lead. Instead of retaliating, other countries should do the opposite. They should remove their own remaining trade barriers, open their economies further and deepen their trade ties with each other. That would send two messages: first, that the world will not be dragged into a 1930s-style trade war; second, that free trade still has adult defenders willing to stand up for it. Let the United States isolate itself behind tariff walls. It is free to do so, damaging as it is. But the rest of us should double down on openness, cooperation and economic common sense. We cannot stop America’s self-harm – paused though it may be. But we can choose not to copy it. |
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| Roger Partridge | Chairman and Senior Fellow | roger.partridge@nzinitiative.org.nz | ||||||||||||
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Critics – including some of us at the Initiative – have longstanding concerns that the capital rules may be too conservative. The RBNZ itself has conceded they would increase lending costs and reduce GDP by up to 0.32% annually. Independent analysts put the latter figure closer to 1%, which would cost our economy up to $4 billion each year. S&P Global described the RBNZ’s capital requirements as “some of the toughest worldwide,” warning they could force banks to cut loans to smaller businesses. This risk is now becoming a reality. Finance Minister Nicola Willis has diplomatically welcomed the review. Her approach has merit. Having the RBNZ voluntarily review its own decision preserves institutional credibility. Yet Willis holds an iron fist within her velvet glove. Unlike monetary policy, prudential regulation is subject to close political oversight – as it should be. Governments typically set regulatory policies, leaving independent regulators to implement them. The Reserve Bank of New Zealand Act’s prudential regulatory provisions reflect this approach. The Financial Policy Remit (FPR) mechanism in section 49 of the Act permits the Finance Minister to specify matters the RBNZ board “must” consider when setting financial stability policies. Willis could direct the board to align with international bank capital norms or to guard against a one-in-100-year risk of bank failure rather than the internationally-unique one-in-200-year risk behind the controversial bank capital decision. The New Zealand Initiative’s submission to Parliament’s Finance and Expenditure Committee documented flaws in the RBNZ’s 2019 decision-making process. The RBNZ conducted a cost-benefit analysis only after announcing its decision – and used questionable assumptions to justify its position. A proper reassessment is long overdue. Parliament created the FPR mechanism to ensure democratic oversight of decisions with far-reaching economic impacts. If the review fails to address these core concerns, Willis can bring New Zealand’s capital requirements into line with international norms. Banking stability matters, but so does economic growth. Without a statutory requirement to balance these objectives, the RBNZ may have prioritised stability over efficiency. A self-initiated review is the right starting point. But, if necessary, Willis should not hesitate to bring bank capital rules into line. |
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| Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz | ||||||||||||
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Landsburg’s version goes as follows: “There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa.
Everybody knows about the first technology; let me tell you about the second. First, you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships … into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them. International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars. Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.” Trade patterns get more complicated with more countries. Iowa’s wheat might stop along the way, turn into car parts exported to Japan, and Japan’s cars then head back to America. America would then have a trade deficit with Japan but perhaps a surplus with wherever the wheat wound up – if wheat and cars were the only things being traded. An overall trade deficit doesn’t mean America’s losing. It means others want to invest in America. That’s winning! The money either buys exports or it buys assets — either way, the money comes back. President Reagan understood. His 1987 speech on the harms of protectionism was eloquent. The Chinese Embassy in Washington shared it on Twitter earlier this week. Trump’s tariffs are like pouring herbicide and soil sterilant on Iowa’s car crop. They wreck America’s best technology for building things – and make the world poorer, too. I wish Trump had read Stephen Landsburg. |
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