Exploring local implications from uncertain Trump tariffs

US President Donald Trump has imposed a series of tariffs upon major US trading partners to encourage more American manufacturing, as well as to pressure its neighbours to shore up border security to prevent illegal immigrants and fentanyl entering the US. The policies so far have been hard to track with changes to the effective dates of tariff policy, exclusions from tariffs, and new policies emerging.

In this article we delve into what has happened so far and the effects on the US economy, before looking at potential impending agriculture tariffs and how they could affect our local economy.

Policies have seesawed from day to day, but here is what we know as of 13 March.

• The US implemented an additional 10% tariff on goods from China (total tariff now 20%) on 4 March.
• The US will impose 25% tariffs on some goods from Canada and Mexico from 2 April.
• Retaliatory 15% tariffs were imposed on selected US farm products from China on 10 March.
• Threats from Ontario of a 25% surcharge on electricity exports to the US were issued, then later rescinded.
• US tariffs of 25% on steel and aluminium imports began on 12 March.
• Potential tariffs on agricultural product imports to the US are set to be introduced from 2 April.
• The EU will impose retaliatory tariffs on the US from 1 April.
• Canada hits the US with $21b in retaliatory tariffs from 13 March.

Uncertainty is likely to persist over the next couple of months as tweaks to the above policies and new policies come into play.

Before the election of Donald Trump, there was a general consensus that the US economy was strong, with job creation throughout the second half of 2024 exceeding analyst estimates, and inflation coming under control allowing the US Federal Reserve to cut interest rates. There was also a period of optimism that tariffs talks were empty threats, illustrated by the US stock market rallying 7.3% after the election until its peak on 18 February. However, as tariff policy has changed rapidly over the past few weeks, the S&P 500 has dropped 9.3% from its peak, illustrating the market’s concern over trade uncertainty and its effects on economic growth and corporate profits.

Cracks have also emerged in the previously strong US labour market, as US-based employers announced over 172,000 job cuts in February, the highest monthly count since the pandemic. Over one third of these announced job cuts were to Federal Government positions, driven by reductions to Federal spending from the Elon Musk led Department of Government Efficiency.

The US Federal Reserve has also communicated its concerns over uncertainty. Last week Chair Jerome Powell stated that the Fed is likely to keep interest rates at current levels until uncertainty eases over policy changes in areas including trade, taxes, government spending, immigration, and regulation. This position represents a stark change from the easing cycle that began in September 2024, when inflation and inflation concerns had eased significantly.

The combination of increased uncertainty over trade policy, cancellations of government contracts, and the Fed pausing the easing cycle is seeing businesses and consumers become more hesitant with their spending.

As a result, this uncertainty is also hitting expectations for US economic growth for 2025. Previously there seemed to be little likelihood of a US recession in 2025 – just a month ago, the Atlanta Federal Reserve’s GDPNow model was predicting +2.9% annualised economic growth for the first quarter of 2025 (equivalent to quarterly growth of 0.7% from the December 2024 quarter). The model is now predicting a 2.4%pa decline (-0.6% quarterly growth), a striking change from a month ago. GDPNowcasts should be taken with a grain of salt as they are often extremely noisy, but the vast change raises the question – is the US causing a self-inflicted recession?

Much of the rest of the world, including New Zealand, has escaped largely unscathed so far, but things could change very quickly. The biggest concern so far for New Zealand arose earlier this month, when President Trump warned tariffs would be imposed on agricultural products entering the US from 2 April.

The US is a major market for some New Zealand agricultural products – for example, 42% of our beef exports in 2024 landed in the US. Growth in beef exports to the US has occurred as the US has grappled with drought, reducing the American beef herd, and the shortage of beef in the US looks set to continue.

Prices would increase for importers of foreign beef into the US and demand would be likely to decline, with the extent of the demand response influenced by the tariff rate. However, a blanket tariff on all beef imports wouldn’t make the US beef shortage disappear, so the effect on New Zealand beef export volumes might be limited, at least in the first instance.

The effects of tariffs could also be seen in wine exports, with around 35% of wine exports from New Zealand in 2024 heading to the US (see Chart 1). If proposed tariffs encompass wine, it will add to the headwinds currently faced by the industry, with global inventories estimated to be high and weak global growth conditions already restricting demand.

We have recently been talking up prospects for provincial and rural economies, based on better agricultural prices. Beef prices were up 8.8% over 2024, horticulture prices have remained strong, and the midpoint of Fonterra’s forecast farmgate milk price is now at $10/kgMS.

The agricultural sector comprised 24% of GDP across rural areas in the March 2024 year and 14% in provincial areas, compared to 5.0% at the national level. Chart 2 gives us an indication of how different regional groupings could be affected by agriculture tariffs from the US.

Chart 2 shows that dairy farming is the largest contributor to the agricultural sector across all regional groups. However, as Chart 1 shows that only 4.4% of dairy exports landed in the US in 2024, the effects of tariffs on the dairy sector should be relatively muted.

Sheep, beef cattle, and grain farming made up 7.8% of GDP in rural economies over the year to March 2024. With 30% of meat and edible offal exports landing in the US last year, the effects of tariffs could be felt heavily by rural economies.

There is certainly plenty to unfold in this trade war, with reciprocal tariffs on US trading partners likely to be next on President Trump’s agenda. Perhaps the most certain thing is that uncertainty will persist – resulting in stock markets fluctuating, multinational businesses pausing investment, and US consumer spending slowing.

If we think about developments from a local perspective, the most worrying implications for New Zealand are as follows.

1. Blanket tariffs on all imports in the US. Trump mentioned this approach in his campaign. However, with exceptions issued for Mexico and Canada on products such as cars, Trump seems more open for more targeted measures than previously thought, even if some of these exemptions are temporary.
2. Tariff policies against our major trading partners persisting (eg, China). The medium-term to longer-term effects on the Chinese economy, which is already under pressure due to housing oversupply and a shrinking population, would result in slower economic growth and, consequently, weaker demand for New Zealand exports.
3. Agricultural tariffs coming to fruition, including for key New Zealand export commodities such as wine and meat. As previously mentioned, the magnitude of the effects on export volumes and revenue are somewhat ambiguous, given the beef shortage in the US, but the outcomes will not be positive for New Zealand producers.
4. Tradable inflation pressures could resurface. Prior to the trade policy changes, concerns about tradable inflation were rising due to a weaker exchange rate (pushing import prices higher) and higher fuel prices (pushing up costs to produce and transport goods). There is now a mounting concern that higher tariffs will push up production costs internationally, leading to a renewed bout of global inflation.

We continue to closely monitor developments across the global economy. We will be further discussing global trends and uncertainty in this month’s webinar on 24 March, with invitations to be released soon.