Sour Grapes With Much At Steak
"It could have been worse" =/= "This could be good"
The United States government, in a fit of imperial arrogance, has decided to impose sweeping tariffs on all imports. Under this policy, European goods and services will be hit with a 20 percent tariff. We are treated more leniently, facing only a 10 percent tariff.
To some people, this looks like a win for us. After all, if our goods are tariffed at a lower rate compared to those from Europe, demand for their goods will be hit more relative to demand for our goods. In turn, we will become more competitive relative to Europe.
So it could even be an opportunity, right? American consumers might favour New Zealand wine more since its price will rise less than the prices of French or Italian wine. Our beef will be more affordable relative to Irish beef.
Unfortunately, this is not how trade works in the real world. Maybe in the mind of Donald Trump, where nobody can win unless somebody loses. Maybe even in the mind of old-fashioned leftists who think there is a fixed amount of wealth in the world.
But in the real world, trade is not a competition where someone’s loss always turns into someone else’s gain. Economies do not work like that. We don’t win just because the French and the Irish lose.
Policies that make imported goods more expensive are not limited in effect to who sells what. They change how much anyone sells at all. They reduce demand. They make everyone poorer. They shrink the market.
The same market that those who are supposedly being treated more favourably are selling into.
Let’s stick with wine and beef, which are two key export markets to the United States. We will just use some made up numbers here because it’s not the actual figures that are important. These are just illustrations.
So, wine:
Before the tariffs are introduced, our wine arrives in the United States at a landed price of $10 per litre.
Wine from Europe, due to different production costs and more established shipping routes, arrives at a slightly lower price of $9.50 per litre.
Because of this price difference and the strength of traditional European brands, European wine has an edge in the American import market and around 70% of imported wine sold in the United States comes from Europe.
For the sake of this example, we will pretend our wine makes up the remaining thirty percent, with about 3 million litres sold to Americans each year.
The United States then imposes its 20% tariff on European wine, raising its price from nine dollars to just under $11.50.
New Zealand wine faces a lower, 10 percent rate, which raises our price to $11 dollars. For the first time, our wine becomes slightly cheaper than European wine in the American market.
We now have the relative price advantage.
Of course, we are at a disadvantage compared to American wines, but let’s set that aside for now.
Our market share increases from 30% to 45%.
But because the United States has imposed tariffs not only on wine, but on all imports from all countries, prices begin to rise throughout the economy. Petrol costs more. Clothing costs more. Electronics cost more. Food and furniture, building materials and spare parts. Almost everything becomes more expensive.
As the cost of living rises, American consumers feel the pinch.
Faced with higher prices for necessities, American households begin to cut back on discretionary spending.
Wine is one of the first things to go.
Instead of buying a bottle or two to go with dinner, people go without.
Overall, the demand for wine in the United States falls.
Before tariffs, 10 million litres were imported each year.
After tariffs, that number falls to 5 million.
So because the market is now smaller, our 45% market share equates to only 2.25 million litres sold, where previously our 30% market share equated to 3 million litres.
We are now in a stronger position relative to Europe, but we are moving less product than before and therefore earning less. It could have been worse, but it is not good.
Now beef, another important export to the United States:
Much of this beef is not destined for fine dining or home kitchens, but rather for the fast food industry.
New Zealand supplies lean, grass-fed beef that is used in burger patties by major American chains.
Before tariffs, our beef lands in the United States at $10/kg (again, a made up figure).
Let’s say Irish beef comes in at $9.50/kg.
Both NZ and Ireland each supplies roughly 50k tonnes of beef annually to the American market and for the sake of the example let’s pretend this is all the imported beef America buys.
After the tariffs are imposed, our price rises to $11/kg and Irish beef climbs to just under $11.50 (or so).
But the fast food business, like every other business, now faces rising costs across the board.
Everything that goes into running a burger chain becomes harder to afford. So prices go up to account for more than just the beef tariffs.
At the same time, the American consumer, under pressure from rising prices on everything from rent to groceries, eats out less often.
With fewer people coming through the doors and fewer dollars spent per meal, fast food chains are forced to reduce costs. Expansion plans are delayed.
They look for cheaper meat, shrink their orders, or simplify their menus. Chicken-based meals start to look like a better deal.
Demand for beef in the United States drop sharply, from 100k tonnes to 60k. New Zealand increases its market share from 50% to 60% but that equates to a 14k tonne reduction in product moved.
Once again, we are relatively better off than our competitors, but worse off than we were before.
This is why we can’t take too much comfort in getting off so “lightly”. Tariffs do not only change the balance of trade between countries, they reduce the volume of trade. They shrink the pie and as a result:
The consumer becomes poorer.
The supplier becomes poorer.
In the longer term, the governments concerned become poorer.
One of the great secrets to understanding the wealth and poverty of nations is to realise that wealth is not static. It needs to be created by interaction, trade, investment and innovation. So when conditions support trust, cooperation and open exchange, wealth tends to increase.
When barriers are thrown up to those interactions, the overall amount of wealth is eroded. Fewer trades happen. Fewer goods are made. Opportunities are lost.
This is why the argument that "it could have been worse" is no comfort at all. It may be true that New Zealand is in a less bad position than the European Union under such a tariff regime. But the probable result is that our producers will make fewer sales and earn less income.
So we will still lose. We will still suffer harm. And there is no real consolation in knowing that someone else will suffer more.
Speaking of "terrorism is bad, actually", I just heard trump's action described as economic terrorism, which doesn't seem wrong. Only consolation is uptick in use of the word "epoch-making"