In previous market meltdowns, and as, once again, global systems, which have delivered prosperity, threaten to unravel, a humorous question asked on London trading floors was “Bottled water and land in New Zealand anyone?” Might this question be again on the lips of investors?
The U.S. has started to pivot towards a more Mercantilist trade stance with new tariffs on imports, announced on the 2nd April 2025. This commentary explores the potential impact on global trade dynamics and macroeconomic stability — and asks whether a return to protectionism is here to stay?
What is Mercantilism?
Mercantilist countries seek to orient their economies towards winning in export markets, and do not like importing goods, which they see as a leakage of resources.
In contrast to this, the US along with the UK, Canada, Australia and NZ have traditionally had a “Ricardian” view of trade, in which nations and companies should specialise in production, where they enjoy a relative competitive advantage, and that trade between such nations will generate mutual benefit.
A problem with this approach is countries, which specialised, for example the US, in tech, finance and services, and NZ in agriculture and forestry, saw jobs in manufacturing move offshore, thus creating ‘left-behind’ communities.
New US tariffs from 2nd April 2025
In the US this has seems to have changed. President Trump will attempt to boost domestic manufacturing by erecting a tariff wall around the USA. With a minimum 10% tariff imposed on all countries. The US’s new 10% base tariff is at a similar level to those imposed by the EU, which are just over 10% on average, but which rise to 32% for some products (e.g. dairy).
Some sectors will be exempt from tariffs. For example, the President announced an exemption for smart phones over the weekend.
Other sectors (cars at 25%, for example) and countries will have higher tariffs, most notably China at 125%.
Responses to the tariffs
In the face of higher tariffs, some countries with a trading surplus with the US have entered negotiations with the US to prevent any detrimental effects to their economies.
In contrast, China has immediately retaliated by imposing 125% tariffs on imports from the US. This includes, for example the alfalfa animal feed, essential for the Chinese dairy industry, which has been travelling in otherwise largely empty containers returning from the US West Coast. This can be expected to raise costs significantly for the domestic Chinese dairy sector, which is already comparatively high-cost.
Meanwhile stock market investors do not like what they are seeing. They have three concerns:
- Many companies are directly impacted. 25% of US merchandise imports have been coming from China. Sourcing these from other locations will take time and may be expensive.
- Due to these input shocks, and headwinds for US exporters, it is likely that global growth will slow, and the US itself now risks a recession.
- Both equity and debt capital markets may be strained. It is not too dramatic a comparison to say stresses similar to the 2008 Financial Crisis may return. At a macro level, export-oriented nations may have fewer surplus funds to recycle into capital markets of countries running deficits. More directly there is a risk that companies, directly challenged by the tariffs, e.g. the UK’s Jaguar-Land Rover, may be required to restructure. Or at least to raise capital to build car assembly plants in the US. This will lower returns, create demand for capital, and in some cases create debt default events, which could reduce confidence and trust in global financial systems.
What may happen next?
In a perfect world, the “global policeman” does his work and, ironically, uses the threat of US Mercantilism to bring the world trading system to a less Mercantilist place. This is the approach, which thinkers like Elon Musk are advocating. Using the leverage of the Trump tariffs to create a free-trading zone between key western countries, starting with the US and the EU. The art of the deal, indeed! However, not all within the US Administration share Musk’s free trade views.
Also, sweeping policy changes often have unintended consequences.
The price of risk
We learned in the 2008 financial crisis, that, if financing becomes unstable, this can impact the real economy. As a result, even us farmers are currently fixated on stock market indices, currencies, interest rates, and credit pricing. If, for example, debt markets go into a panic, might unavailability of financing exacerbate risks to growth?
Will it pay to become Mercantilist?
In summary, the US has, at least for the moment become strongly Mercantilist. And Canada may go the same way by threatening the US with tit-for-tat tariffs.
The UK, in contrast, has cut all remaining import tariffs in order to boost the UK economy.
We believe New Zealand may be wise to follow the UK and not impose tariffs on imports.
It is not in the interests of a small country with limited labour resource, such as NZ, to attempt to foster industries such as car manufacturing behind a tariff wall. Instead, we should continue to rely on multilateral and bilateral trade agreements, such as the CPTPP and the recent EU-NZ free trade deal, to ensure broad market access
New Zealand should keep its head down and continue focusing on what it is good at; with 82% of exported goods already coming from farming and forestry, the competitive advantage in these sectors is very clear.
