Tariff Surprise! Love from the capricious court of Donald Trump

Saturday, 2 August 2025

Luke Malpass is the politics, business and economics editor.

OPINION: When Donald Trump made his first Liberation Day announcement in April, everyone was worried – where would the tariffs land?

In the event, Trump showed up in front of the White House with a big list of “reciprocal tariffs”, which appeared to bear no resemblance to tariff rates, but instead to the trade deficit that the US ran with other countries.

New Zealand has a small trade deficit with the United States. Overall, two-way trade is $28 billion, with the US having a $4b shortfall. But that includes goods and services – when it comes to goods alone, the deficit comes to about half a billion. Nothing, really.

In April, because New Zealand was not seen as ripping off America by way of a big trade deficit (which is the equivalent of saying I run a trade deficit with my hairdresser and they are ripping me off because they don’t want to buy political columns, so I pay them money instead), New Zealand got a 10% tariff. This was the minimum tariff that basically anyone in the world got – with the exception of states such as Russia and North Korea.

Although this new tariff regime – which was actually a tax on imports that will be paid by US consumers – was bad, for free-trading nations such as New Zealand it was no worse than anyone else.

In the event, Trump pared back most of those tariffs to renegotiate deals with other countries. But for New Zealand there was no competitive disadvantage (and possibly some minimal competitive upside).

This time there is.

And that’s because Australia, the United Kingdom and Chile have only 10% tariffs. In fact, a number of countries do.

There doesn’t seem to be much reason why New Zealand’s is 15%, except that we exported slightly more in goods by value than we imported last year. But there you have it.

Now, not only is a higher tariff regime worse for global growth than the alternative, but New Zealand is disadvantaged compared to Australia in particular.

Just as the agricultural exports sector is fetching high prices and starting to shine as a stand-out bright spot in an otherwise pretty grim economic outlook, Trump’s tariffs add an extra tax on US importers and consumers to buy New Zealand goods.

Trade Minister Todd McClay made the good point that prior to Liberation Day, Australia had benefited from a free trade deal with the United States, which New Zealand never had.

This time, as with the Liberation Day tariffs, a list has been produced and countries around the world are scrambling to work out why they have been hit at a particular rate.

The intellectual dishonesty or stupidity of the whole thing continues to amaze US trading partners – allies and adversaries alike.

The Luxon Government’s general foreign affairs and trade posture with the Trump administration is to keep quiet, make representations in private, and do nothing that might upset the Americans or get New Zealand on Trump’s desk for any reason. The calculation is that there is more downside in pissing off Trump than upside in trying to publicly convince his administration of anything.

Based on how it behaves towards friends, that is probably a realistic and reasonable assessment.

That approach has clearly not worked to ensure that New Zealand gets the minimum going tariff – which would be 10%. We got the same as the Europeans and lots of others of a lot more size and economic importance. That isn’t to say that Trump won’t change his mind on New Zealand (everything is negotiable), but given our relative global importance, it seems unlikely. But then again, who knows?

The way to measure the success of New Zealand’s approach is whether anything would have changed Trump’s mind on levying bigger tariffs on anyone with a trade deficit – regardless of how small or large it is.

The answer to that at this stage appears to be no. The coming weeks will reveal whether there is any further room for movement.

More generally, there seems to be a sweet spot to get Trump to act that lies somewhere between being politely respectful and kissing the ring – but where exactly that is is changeable and difficult to assess.

Exports and export volumes to the US have continued to rise over the past 12 months, but now that the tariff is up to 15%, passing on costs to US consumers becomes more difficult.

Politically, this comes at a terrible time for Christopher Luxon, Nicola Willis and the Government. Willis and McClay, both en route to Christchurch for the National Party conference, fronted media. As with the fallout from Liberation Day, Willis was assured, calm, impressive, and did her best to be upbeat. Luxon did not front.

The Government’s basic political problem is that it has leaned into policies of growth, prosperity and aspiration – but so far has not had the economy to back it up. The important exception to this is the export and agricultural sector, which is propping up the Government’s and country’s bottom line. But most in those sectors already vote for National or its coalition partners.

The new tariffs might not make things much worse – but they certainly won’t make them any better, adding to the Government’s long wait for the economy to start to recover more broadly.

It will also likely drag on global growth.

There are a few things to note here. Trump often seems fixated on the effect of policies on US markets – stock markets in particular. But stock markets ultimately just show what they think of current and future profitability of individual companies. Global policy settings and trends feed into that, obviously, but even if overall growth is lower, that might not be a huge drag on US firms (although it will clearly smash some).

In the end, it was bond markets that Trump appeared to listen to when announcing a pause on his tariffs last time.

The second thing is that if there is a drag on US GDP growth – which Bloomberg Economics estimated could be hit by 1.8% – it will also certainly drive up core prices in the United States.

But the effects on global growth could be different – having a chilling effect on economic activity, being disinflationary, and tamping down growth – leading to lower interest rates, which conventional wisdom suggests will help the Government.

The wash-through is as yet unknown.

As with the last time that Trump ramped up his tariffs, there is considerable uncertainty about what will stick and what will not. He is capricious, and which rates will end up being retained on which country is anyone’s guess.

But what is certain is the following. The average rate of US tariffs was 2.3% in 2024 and now it will be over 15%. That is a massive new tax on imports for American consumers. In response to that, some consumers will buy less, seek to make substitutions, and some will simply switch to different goods.

Because of global supply chains, it will increase many input costs for US manufacturers and producers.

There are no winners here – not the US consumer, not global trade, and not the international rules-based trading order.

This is Trump in his element – where nations around the world have to come to him and pay court to try to beg their case for favourable treatment. Insofar as Trump has a political philosophy, it seems to be about making himself the centre of attention and key decision-maker – not unlike a massive episode of his former TV show, The Apprentice.

And in the end, McClay is correct. This is not about tariffs at all really, but about trade deficits. And trade deficits being bad is one of the few and enduring beliefs Trump holds.