Luxon says NZ should stay ‘cool and calm’ in face of US agricultural tariff threat

Wednesday, 5 March 2025

ANALYSIS: Prime Minister Christopher Luxon says the Government needs to “keep cool and calm” as it faces the possibility of tariffs being slapped on New Zealand agricultural exports to the United States.

“Once the details are there, I will advocate very strongly if I think there's any loss of national interest, and of course I would be engaging with President Trump directly on that,“ he said.

A Rabobank report recently outlined how in 2024, the US overtook China as the largest export destination for New Zealand meat.

Now, about 40% of New Zealand meat goes to the US, and the US is also the second-largest destination for New Zealand sheepmeat after China. About 6% of New Zealand’s total dairy exports head to the US and a third of our total wine exports.

All these sectors were at risk with Trump’s threatened tariffs announced this evening, although the detail had yet to emerge.

Finance Minister Nicola Willis said New Zealanders would be feeling “some insecurity and instability”.

“What I would want them to know is that New Zealand has multiple strong trading relationships around the world. The exports that we send are in high demand, and I have confidence that New Zealand will continue to do well.”

New Zealand’s “red meat relationship” with the US was a complementary one, she said.

“We largely export lean beef, which is a good blend with their beef. There's high demand for our meat because they don't produce it in the quantities needed for the domestic market.

“Our meat is the best in the world, the most efficiently and sustainably produced. And I think any country in the world would be grateful to get it,” she added.

United States President Donald Trump said the US would impose tariffs on “external” agricultural products on April 2, which could put New Zealand farmers in his ever-growing firing line.

“To the Great Farmers of the United States: Get ready to start making a lot of agricultural product to be sold INSIDE of the United States.

“Tariffs will go on external product on April 2nd. Have fun!” he said in a social media post.

The Ministry of Foreign Affairs and Trade told The Post it was aware of Trump’s statement but wasn’t going to “speculate and react”.

The ministry’s statement came ahead of Trump’s speech to Congress on Wednesday afternoon (NZ time) when he said reciprocal tariffs will be imposed on most of the country’s trading partners, and he told US farmers “nobody is going to be able to compete with you”.

It is sensible for the Government to wait with a dead bat before saying more, given the yo-yoing nature of Trump’s threats of tariffs against Canada and Mexico, for example.

But if Trump follows through, it would be the biggest disruptor to trade flows that farmers had seen for a while.

The US imported Kiwi products worth $9 billion, according to figures released by Stats NZ in January.

To date, the only tariff hit New Zealand has experienced from Trump’s second term has been to the Tiwai Point aluminium smelter, owned by mining giant Rio Tinto.

Last month, the US increased its tariff on aluminium imports from 10% to 25%.

New Zealand exported $70m worth of the metal to the US in 2023. But it is not clear how much that tariff hike will threaten even those exports.

That’s given some of the smelter’s exports to the US comprise high-grade aluminium for the defence industry for which there are few other suppliers and for which Rio Tinto has received a tariff-break in the past.

Tariffs on agricultural exports would be a different kettle of fish.

Rabobank senior analyst Benjamin Picton said for beef products, New Zealand can make the argument to the Trump administration that the US can’t actually supply itself, because consumption is close to all-time-highs and the US herd size is the smallest since the 1950s.

“So, the USA needs to import to meet its own consumption requirements, and any tariff applied to those imports will just result in higher prices for consumers with no ability to substitute for local product in the short term,” Picton said.

“So, a tariff would be self-defeating, but even if it is applied I expect that we will still see New Zealand beef flowing into the US market.

“Over the longer run this argument doesn’t really work, because the whole point of tariffs is to raise costs to consumers to provide a subsidy to domestic producers.”

Sirma Karapeeva, head of the Meat Industry Association, said it was too early to speculate on the potential impacts of any US tariffs on New Zealand red meat exports. But she said New Zealand exporters were flexible and would adapt as necessary.

Exports of meat alone to the US valued $2.6b last year, according to Stats NZ, while dairy exports valued $883m and wine $702m.

But it doesn’t follow that US tariffs on food imports would be an total economic catastrophe.

The economic pain from tariffs falls on both the importing and the exporting nation, which is why they tend to be viewed as a “lose-lose” policy.

The “law of supply and demand” dictates that tariffs will result in a drop in the volume of the product traded between countries subject to the tariff.

And it also dictates that they will result in both an increase in the price consumers pay in the importing country and a drop in the price exporters can expect to receive for their goods there.

But in the case of food, people still need to eat and the US can’t suddenly increase its own agricultural production, so the amount of food that will need to be produced and sold globally shouldn’t change too much and neither should world prices.

There would be some negative impacts of course, but these should to a large extent be soothed by compensating movements in exchange rates and the redirection of trade to other markets.

Writing in the journal Foreign Policy, Agathe Demarais, a senior policy fellow in geo-economics at the European Council on Foreign Relations, explained the best response to tariffs was to “stay calm and not retaliate”, as doing so just adds to the shared pain.

That’s from a purely economic perspective, of course.

She cites research from the London School of Economics that Trump’s earlier proposals for a 10% universal tariff, a 60% tariff on imports from China, and a 100% tariff on all imported cars would reduce the EU’s GDP by just 0.1% — so long as the EU didn’t respond.

That begs the question of why countries do often impose retaliatory tariffs.

The reason isn’t so much because the “tariff aggressor” has cheated and done themselves some sort of favour at the expense of the tariffed country, and that retaliation is needed to even the score and somehow makes things better.

It is more to do with demonstrably adding to the pain that the country that first imposed tariffs self-inflicted on itself, to encourage a backdown — as we are seeing play out in the Canadian government’s targeted response to the 25% tariff Trump has imposed on Canada.

So far the response from China to Trump’s 20% tariffs has also been to maximise that pain on the US while minimising the impact on its economy by carefully confining retaliatory tariffs to products that it can most easily source elsewhere.

But both the original and retaliatory tariffs are probably still a lose-lose.

New Zealand could join in the same game if its agricultural exports to the US have tariffs imposed on them.

But the self-interested response would be to maintain the high ground on free trade and watch this one play out — especially as it could all be off again next week.