CHRISTCHURCH AND AUCKLAND, MAY 2025

STEPHEN JACOBI, EXECUTIVE DIRECTOR

GLOBAL MACRO-ECONOMIC AND TRADE UPDATE

My thanks as always to Brightstar for the invitation to be with you today.

As some of you will know I have been a serial attender at these events, normally acting as a sort of “trade Cassandra” warning of turbulent times and dangers ahead but also – hopefully – pointing to the opportunities for New Zealand in global markets.

And these opportunities still exist, despite the fog and the clamour of recent weeks.

But here’s the thing: just as we thought things were getting a little better, post pandemic, and, despite the wars that keep on breaking out all over the place – mostr recently in South Asia – and as the global economy, was at last starting to kick into gear, there was an election in the land of the free and the home of the brave.

And now –  now, we find ourselves living in a time of extraordinary global challenge and change – some say at an inflection point – when much of what we thought we knew about the world, about the global order and even about trade itself, is being turned on its head. 

Against this rather dismal background, I’d like to talk today about:

• the current environment for global business
• what we can expect from this trade war (though, let’s face it, nobody really knows)
• and about what impact this might have on us all here in Aotearoa New Zealand.

As in the past, my comments refect the views of the NZ International Business Forum, an organisation bringing together the larger players in New Zealand’s export economy.

Global environment

Amongst many words, there is one word which describes the world today – “uncertain”.

The root causes of this uncertainty are not just to do with decisions of the Trump Administration, but reflect signifcant geo-economic and geo-political shifts fueled by conflicts in Europe and Middle East – as well as a continuing and dangerous “game of thrones” in the Asia Pacific region.

Not to mention the continuing climate crisis and rapid technological change, both of which are changing the way we live and do business.

I’m grateful to my friend John Balligall and his colleagues at Sense Partners in Wellington who produce an Index of Trade Policy Uncertainty, which seems to sum up very well where we find ourselves.

The detail matters less than what the index is telling us – for those involved in trade,

uncertainty is at an all time high  – twice as bad in fact as it was back in March ! 

Three times worse than when President Trump was last in power.

Yes tariffs and trade barriers are bad, but uncertainty is worse and particularly for investment.

It is the chilling effect uncertainty has on investment that is the bigger problem.

Markets have been rattled by escalating protectionism in the form of new tariffs in the United States, and by the constant changes back and forth, including threatened and actual retaliation between trading partners.

Sense Partners point out that a firm’s investment in technology, infrastructure or new staff is not easy to reverse.

These irreversible costs mean that many firms will prefer to wait and watch rather than investing in uncertain times. 

That’s bad for growth but its also bad because it deters the capital investment required to address the macro challenges like job creation, climate change and economic development.

We see the impact of uncertainty in the latest IMF report.

The global economic recovery was already slow: it has now been revised downwards to 2.8 percent for 2025 and 3 percent for next year – we’re back to being below the long term average of 3.8 percent.

Emerging markets in the developing world are faring better than the advanced economies – some of those emerging markets especially in Asia are significant partners for New Zealand.

New Zealand is also feeling this effect – if you’ve been brave enough to look at your kiwisaver or investment fund balance you’ll know what I mean.

We see uncertainty reflected in the World Trade Organisation estimate for trade growth this year – the volume of world merchandise trade is now expected to decline by 0.2 percent in 2025 before posting a modest recovery of 2.5 percent in 2026.

The WTO says this new estimate for 2025 is nearly three percentage points lower than it would have been without recent policy shifts, and marks a significant reversal from the start of the year, when WTO economists expected to see continued trade expansion supported by improving macroeconomic conditions.

Trump’s tariff world

Protectionism is not new, nor just the fault of any one country, but the current US Administration is turning it into an art form. 

The changes in trade policy either conceived, planned, announced, implemented and then suspended, are so rapid and far reaching that it has been hard to keep up.

Trump’s tariff world, highly simplified in this table, is notable for a number of things:

• The scale of tariffs applied thus far with 10 percent as a minimum reaching earlier to 145 percent and now reduced for a period to 30 percent for China – trade is impossible at the upper level and difficult at the lower one
• The differing legal justifictions for these tariffs are based on national security which tend to override due process – a recent vote in the Senate failed to block the tariffs even though it is the Congress, not the Administration, that is given in the Constitution the power to regulate commerce
• The retailiation underway or threatened from trading partners, which while understandble, magnifies the scale of the problem
• The unknown, still to come, including for New Zealand investigations into wood products and and also pharmaceuticals which could penalise us further.

For New Zealand, additional tariffs of 10 percent are a big risk for the continuity of our $9 billion dollar business with our second largest trading partner.  

(By additional tariffs we mean that if there was previously no tariff, say for example on wine, we now pay 10 percent, but where was a tariff, say 15 percent on butter, we now pay 25 percent).

It’s cold comfort that New Zealand’s average (weighted) tariff on US imports is 1.8 percent (not the 20 percent the US claimed!).

This compares to an average 4.2 percent applied earlier by the US to New Zealand. 

If this were not bad enough, New Zealand stands to be impacted by the tariffs the US applies to other partners and by other partners’ retaliation. 

While for the time being most of the tariffs above 10 percent have been temporarily suspended (although only partially on China), the risk is that future increases could have negative effects on growth in those markets.

We could also face increased competition from exports diverted away from the United States.

Beef is a case in point (and I’m grateful here to colleagues from Beef & Lamb NZ).

New Zealand beef exports to the US were worth $1.8 billion in 2024, mostly grinding beef for hamburgers but also higher value cuts.

The United States is a huge market for beef where imports play a big role in supporting local production.

In the United States, we now have to pay an 11 percent tariff:  Australia pays 10 percent, Canada and Mexico still at zero, but our South American competitors pay 36.4 percent.

For the time being it appears we can manage an 11 percent tariff particularly as US consumption is still high.

But 36.4 percent is another matter – where does that South American beef now go –quite possibly to markets in Asia.

In China, where the US beef exports have ceased under the retaliatory tariff, an opportunity has suddenly opened up, for us (with a zero tariff), but also for our competitors – can the Chinese market really accommodate all that extra beef at a time when there is already sensitivity about surging beef imports ?

And similarly how much US beef and dairy products might be shifted to the UK as a result of the “deal” that has now also been done?

This is what we mean by a trade diversion and it’s what happens in a trade war – let’s call it by its real name !

Impacts on New Zealand

It’s just a crying shame that all this is happening at a time when exports have been doing much better.

Trade performed pretty well during the pandemic, notwithstanding the challenges experienced by supply chains.

Goods exports declined around the middle of 2023 as inflation grew but began to stabilise in 2024.

The growth trend has continued in early 2025 as we recorded one of the best quarters with significant increases across the board but especially for our major exports – dairy, beef and horticulture – and for key markets like China, the US as well as the EU and UK under newly minted FTAs.

That was before the advent of US tariffs and quite possibly this reflects a degree of pre-shipment of goods to the US to avoid the tariff impact.

Services trade especially tourism and international education has been slow to rebound post Covid but the numbers have been improving steadily.

Which makes the current talk of a tariff on movies all the more worrying, even though actually imposing a tariff on services especially those delivered digitally is not at all straightforward and probably impossible to proceed with.

The better news is that New Zealand has a network of high quality and comprehensive FTAs with a range of partners.

We have good if uneven market access for our exports in Asia, Europe and now also the Middle East with new FTAs with the United Arab Emirates and, soon, the Gulf Co-operation Council.

Yet there’s no doubt that this trade uncertainty presents New Zealand with a real dilemma.

We clearly need to maintain the closest possible relationship with the US – hence the Government’s careful handling of the response to additional tariffs.

Our strong economic relationship with China, where we pay mostly no tariffs at all, looms large in this context – it is a relationship which while complex needs to be carefuluy and proactively managed, particularly in the light of geo-political tensions.

I am certainly hopeful that the Prime Minister will visit Beijing with a business delegation soon – that visit is now long overdue.

The fact is we have global trade interests to promote and protect – as a small open trading nation we depend on the rules of international trade enshrined in the World Trade Organisation (WTO) and reflected in the FTAs we have signed and ratified.

In today’s contested environment it is hard to predict what could happen and while it is certainly necessary not to over-react, doing nothing is not a realistic option.

New Zealand exporters need not just to preserve existing business by being well informed and working work closely with partners and distributors in market.

Government agencies, MFAT and NZTE, are stepping up to help – there is a dedicated hot line to report any problems and regular briefings are being organised.

But, as business knows well: where there is risk, there is also opportunity: exporters need to be ready to exploit new opportunities that could well open up, especially as US competition could be constrained in some markets.

Take for example the case of wine to Canada where US wine has been largely removed from the retail shelves.

So we need, both as a country and individual enterprises need to react strategically but remain flexible to adapt to the changing environment.

Two other important trade developments should also be noted.

First, in a somewhat surprising move India has agreed to re-open trade negotiations which have begun in earnest.

Encouraging India back to the negotiating table has not been easy and all credit must go to Trade Minister McClay for achieving what seemed even a few months ago highly unlikely – that India would agree to launch a comprehensive negotiation including agriculture.

If it has not been easy to start, it may not be easy to finish: our talented trade negotiators have to find a way to bridge the gap between the two sides not just on dairy but also sheepmeat and apples as New Zealand negotiating priorities and visas for India.

India’s latest FTA with the UK may not offer much hope: it has taken three years to conclude and the liberalisation it provides is still rather modest.

India is important to New Zealand as being one of the few large economies (along with the US) with which we do not have free trade arrangements.

It is a vibrant and growing market which should figure more highly amongst our partners and with many sectors offering potential for co-operation from horticulture to digital technology.

Some say that New Zealand should just forget about dairy, our largest export sector.

To do so at a time when the world is becoming a more difficult place to trade would send a damaging signal to other partners that we are not prepared to protect our key interests.

No-one is suggesting that complete tariff elimination for dairy in India is a realistic objective, but finding a way to ensure dairy and other key sectors are included is the task before our negotiators.

The other development relates to the proposal by the Prime Minister to encourage enhanced dialogue between the 12 members of the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and between CPTPP and the EU.

CPTPP was originally a New Zealand idea for bringing together like-minded partners in an ambitious, high quality and comprehensive agremement.

And New Zealand was instrumental in founding CPTPP after the United States parted company during the first Trump Administration.

A high water point in trade liberalisation was reached when CPTPP was finalised in 2018.

In the current environment Prime Minister Luxon has been absolutely right to pick up the phone to his CPTPP counterparts.

Today CPTPP needs both to deepen and expand: the Agreement was negotiated some years ago and is rapidly becoming out of date as other high quality agreements are concluded. 

To reach its full potential CPTPP also needs to be expanded – the UK has been successfully added, but more recently only Costa Rica has been approved for membership.

A number of other candidates are in the queue including China, Chinese Taipei and Indonesia.

If CPTPP cannot find a way to add new members in a more timely fashion its relevance as a global reference point for trade will diminish.

And when the WTO is seriously weakened we need more ambitious agreements like CPTPP all the more.

So developing a dialogue between CPTPP and the EU, as the PM suggests, makes sense and should be explored.

Dialogues of this nature are where new avenues for co-operation open up – we should be doing more of this, not less.

Conclusion

Hang on to your hats my friends !

We face an uncertain and increasingly protectionist world: we are going to have to be flexible in our response and to work hard to make the best of the trade agreements and relationships we have like CPTPP, negotiating new ones where we can, like India. 

It is too early to pronounce the death rites for the international trading system, but that great wave of trade liberalisation which we have enjoyed for 30 years or more is now coming to an end.

But we are not without options despite what happens in Washington, but the lack of global trade leadership is now a real problem and it is not clear how the vacuum will be filled.

There are plenty of trade-Cassandras pointing to doom at every turn, but what we really need today are trade champions – governments and businesses who are prepared to stand up for the rules of a system that generally has served us well over the last thirty years.

How the world reacts to the new reality now upon us will define the shape of economic and social progress in decades to come.