Risk of fallout, economist says

An escalation in protectionism would be damaging to a small and trade-reliant economy such as New Zealand's, ASB chief economist Nick Tuffley says.

A trade war involving three of the major economic blocs - North America, East Asia and Europe - could dampen global economic activity.

In combination, those economies accounted for about three-quarters of global GDP and more than 40% of global population.

Two of the three largest trading partners with the United States - the European Union and China - were also two of the top three trading partners for New Zealand.

Australia, New Zealand's second-largest export market, was also heavily reliant on trade with the ``Big Three'', Mr Tuffley said.

``So far, we assume calm heads prevail. Still, there is always the risk the situation deteriorates further, which will generate considerable fallout to the New Zealand economy.''

A trade war could raise costs, add to geopolitical friction and equity markets could fall as they attempted to gauge the potential impact on corporate earnings, he said.

The Reserve Bank might also consider cutting the official cash rate but it would be highly conditional on several factors, including the impact on our dollar and the supply potential for the New Zealand economy.

Mr Tuffley's comments came after US President Donald Trump increased his rhetoric regarding the imposition of tariffs on imported steel and aluminium.

The decision to impose the steel tariffs looked to be based on other considerations beside bilateral trade flows.

The largest exporter of steel to the US was Canada, not the EU or China, which was No11, Mr Tuffley said.

The Trump Administration was renegotiating the North American Free Trade Agreement (Nafta) with Canada and Mexico.

``It could well be the idea to impose tariffs is a tactic to strengthen the US position in current Nafta negotiations.''

Canada was the largest single market for US exports and the third-largest source of US imports behind China and Mexico, but it tended to run a broadly balanced trade position with the US, he said.

Canada and Mexico might not be the only two countries getting a break from US tariffs on imported steel and aluminum. New Zealand was among nations already seeking tariff exemptions, something Australia had already received.

The risk was tit-for-tat measures might prompt the fear of an all-out trade war starting, Mr Tuffley said. Already, the EU, Canada, Mexico, China, Japan and Brazil were considering retaliatory steps.

A China Government representative said China would respond as necessary in the event of a trade war with the US and warned such a war would harm all sides.


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