Tariffs, taxes, and the new ingenuity
Tuesday, 12 November 2024
Tim Hurdle is a former National Party senior adviser and is a director of several companies, including Museum Street Strategies, a public affairs firm.
OPINION: The word that has staged the most dramatic comeback in 2024 is “tariff”. But what does that word mean – the one Donald Trump calls the “most beautiful”?
Used as shorthand to describe the tax or a customs duty charged on imported goods by a government, a massive book (now database) The Working Tariff sets out the rates of duty charged on imported goods by product. This is further complicated as rates can differ by country, according to the agreements negotiated.
One of the earliest forms of taxation, governments could easily generate revenue by inspecting and charging taxes on goods crossing borders. The first major law passed in the United States was The Tariff Act of 1789. The first taxes imposed in New Zealand were tariffs in 1840, income tax only arrived in 1891.
Tariffs make goods more expensive to import, lifting prices and distorting economic activity.
New Zealand has largely eliminated tariffs over the past 40 years. The trade deal with China meant revenues collected dropped to near zero, while shoes and clothing got cheaper, improving the cost of living.
The movement to reduce tariffs was a global approach which started after the Second World War. The trade barriers erected in the lead up to conflict were identified as a key contributor to the hostilities. Politicians agreed that trade promoted peace. Over the following decades, successive negotiations by many countries reduced the levels of tariffs. This increased trade and economic growth for all countries.
The global economy expanded, maximising production at the best prices and lifting the standard of living. People could afford more and there was greater choice. The success of liberalising trade was clear and there was a massive decline in global poverty. World Bank data says there are more than a billion fewer people living below the International Poverty Line today than in 1990.
New Zealand was a big advocate and beneficiary of this freer trade. We thought the World Trade Organisation, founded in 1995, would mark a permanent shift to a clear and transparent set of trade rules. We have tried to stay with this line for 30 years, but global events suggest we need a new gameplan.
There has been a backlash against the globalisation of trade. Manufacturing declined in the Western European and American economies. Farmers feared the loss of traditional methods and security. Developing countries felt at the mercy of multi-national corporations.
With trade flowing to the most efficient producers in the global economy, the steel and manufacturing industries in developed countries declined. In the recent US election, we heard the term “Rust Belt” – which was formerly the “Steel Belt”. Their once mighty factories closed, and the high paying jobs were lost.
Those disaffected and alienated by globalisation have expressed concern through the ballot box. Politicians have rediscovered the seductive nature of protectionist arguments to win votes.
Governments can use tariffs to make imports more expensive – making domestically produced goods relatively more competitive. Bringing back tariffs could promote re-industrialisation. But the higher cost of materials and greater demand created will also push up prices for American consumers. Tariffs distort economic efficiency and destroy jobs.
Consumer goods and food will get more expensive. New Zealand sells thousands of tonnes of meat for hamburgers into North America. Higher tariffs for New Zealand beef could increase the cost of a burger for US consumers.
Tariffs cause diversions and distortions in trade. US exporters will face retaliatory barriers. The evidence is clear that while a minority may benefit from tariffs, the majority will have a lower standard of living.
Trade has come a long way from frozen meat carcasses or bushels of wheat thrown on the dock, to be counted by the Customs officer. Tariffs will be challenging to implement and the impacts hard to predict.
Modern production involves “global value chains” – parts and pieces manufactured around the globe, assembled in other countries. Complex rules are required to determine the “origin” of a product and the tariff rate that applies to sophisticated modern goods. Allegedly Apple uses suppliers in 43 countries to make an iPhone. Driving up the cost of imports can make domestic producers less competitive in world markets.
New Zealand will need to adapt how we trade with the end of the globalisation era. Our traditional agricultural products could be caught in the storm. While our free trade agreements prevent the reimposition of tariffs, goods diverted from US markets will distort prices.
But there are also industries that are unlikely to be impacted. The increasingly important services trade conducted through the internet or in a non-physical way – is harder to slap a tax on.
Creativity, innovation and entrepreneurship will be crucial to our future economic growth. We need to adapt to the new populism and bring back “ingenuity” as the Kiwi word of 2025.