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Trade war could create 'considerable fallout' to NZ economy

Trade war could create 'considerable fallout' to NZ economy: ASB economists

By Paul McBeth

March 12 (BusinessDesk) - New Zealand's small and trade-reliant economy faces "considerable fallout" if the imposition of US tariffs on steel and aluminium triggers a trade war, say ASB Bank economists.

The local economy is expected to report a faster pace of growth in the December quarter on Thursday when Statistics New Zealand releases the official data and has been a beneficiary of strong global trade. However, ASB's research team headed by chief economist Nick Tuffley warns that may be at risk if US President Donald Trump's trade protectionist stance stokes retaliation by the world's larger nations.

"So far, we assume that calm heads will prevail. Still, there is always the risk that the situation deteriorates further, which would generate considerable fall-out to the NZ economy," ASB economists said in a note. "A trade war could raise costs, add to geopolitical frictions and we can well see equity markets head south as markets attempt to gauge the potential impact on corporate earnings."

Since Trump first announced his plans at the start of the month, the New Zealand dollar has gained 0.9 percent to 73.14 US cents, the yield on New Zealand 10-year government bonds has climbed 7 basis points to 3.02 percent and the S&P/NZX 50 index has gained 1.5 percent to 8,467.65.

Trump has announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminium imports, which are expected to come into effect by the end of the month. However, these barriers have differed from earlier US administrations in that they've been justified on national security terms rather than a purely economic rationale, which is an allowable exemption under World Trade Organisation rules.

So far Trump has offered exemptions to Canada, Mexico and Australia, while Europe and China have indicated a willingness to retaliate.

A spokesman for Trade and Export Growth Minister David Parker said New Zealand has formally sought an exemption from the tariffs, and while the details are still to be clarified, New Zealand may fall within the flexibility offered to close security partners.

"I am also concerned about the secondary impacts of these tariffs in terms of the knock-on effects on prices of steel and aluminium products around the world, including in New Zealand," Parker said in an emailed statement. "A tit-for-tat escalation benefits no-one and hurts everyone."

Last week, Parker signed the Comprehensive and Progressive Trans-Pacific Partnership with 10 other nations on the Asia Pacific rim, including Mexico and Canada.

ASB economists said the fear of a trade war could discourage tit-for-tat responses, although the potential for broader US tariffs aimed at China "could be a background concern for markets and a source of potential volatility over coming months," they said.

If a trade war does break out, ASB economists warn the Reserve Bank could be forced to cut the official cash rate from its already record-low 1.75 percent, although that would depend on a number of factors, such as its impact on the currency and the supply potential for the economy.

(BusinessDesk)

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