Impact of US tariffs on New Zealand exports

The Westpac Economic Overview covered a lot of material to do with the impact of a tariff on NZ exports to the US. The flow chart below looks at the micro economy. The US importer and foreign exporter negotiate landed price in the US taking into account the price elasticity of demand:

When a tariff is imposed on inelastic goods, consumers are less responsive to price changes. Therefore, the price increase due to the tariff is likely to be passed on to consumers by the importers or producers. This results in higher prices for these goods without a significant decrease in quantity demanded. Importers may absorb some of the tariff cost if competition allows, but generally, consumers bear most of the burden

With elastic goods, consumers are more responsive to price changes. When a tariff increases the price of these goods, consumers are likely to reduce their purchases or seek out cheaper alternatives, including domestically produced substitutes or goods from countries without tariffs. Importers and producers may face reduced sales volumes unless they can absorb the tariff costs to remain competitive.

NZ$ – US$ exchange rate. If the currency depreciation is large enough, it may offset the tariff’s impact. For example, if a NZ exporter faces a 10% tariff in the US but the NZ$ weakens by 15% against the US$, the exporter’s goods might still be cheaper despite the tariff. If the tariff is too high, it may outweigh the benefits of a weaker currency, making exports less competitive in the target market.

Availability of domestic substitute supply The strength of negotiating positions, partially influenced by the availability of alternative supply sources. Limited domestic supply means the exporter if a stronger bargaining position especially if the good is inelastic.

The macro impact of US tariffs on NZ remains uncertain. At this stage it is unclear whether the US will impose tariffs on imports from NZ. The macro impact of such a tariff would depend on many factors:

• The size of the tariff imposed; how it compares with tariffs imposed on competing exporters to the US; whether affected countries impose retaliatory tariffs on the US.

• How the burden of the tariff is shared between US consumers, importers and exporters, and how US consumer demand responds.

• How tariffs impact the global structure of interest rates and the NZ dollar

• The extent of flow-on effects to foreign import and export prices, hence lowering returns to NZ exporters and lowering NZ import prices.

Impact of a tariff on trade.

US tariffs are most likely to result in:

• Lower global demand and incomes, lower demand for NZ exports and higher inflation in markets subject to tariffs (at least temporarily).

• A lower NZ dollar – which will reduce the impact on NZ exporters but increase import prices for NZ households.

• The impact on RBNZ interest rate policy will depend on how much NZ inflation rises, how disinflationary the impact of weaker GDP growth is; and crucially, the overall impact on inflation expectations.

Sources: Westpac Overview – February 2025

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