What could a global trade war mean for Kiwis?
This month has been dominated by talks that the White House is attempting to punish China for what it sees as unfair trade policies and manipulation of their currency to make their imports relatively cheaper than US-made goods in the American domestic market. Posturing between the US and China threatens to freeze trade and capital flows between two nations that make up a substantial percentage of the world’s trade volume. This could have major indirect impacts on local retailers and consumers alike.
If a trade war is to occur the greatest impact in the consumer economy will fall on retailers that rely on imported goods bought in from China. Prices paid by domestic consumers in the US consumer market would increase, which would reduce demand. Given the size of the US, this would have major implications for global demand. In the short-term New Zealand would experience cheaper goods coming in from Chinese suppliers looking to offset loses in the US market. In the longer-term, Chinese producers are likely to reduce production volumes in response to lower demand, which in turn increases the per unit cost of manufacturing products. This would increase costs passed onto consumers and take profit out of retailer’s margins. However retail sectors with a more localised supply chain like Supermarkets, Cafes & Restaurants and Accommodation would remain relatively less affected.
This reduction in global production out of China specifically would impact the margins of trade exposed retailers that sell durable and discretionary goods including Electronics, Pharmaceuticals, Clothing, Furniture, Toys, and Liquor. These retailers have been growing at an annual rate of 3.5% over the past four years — considerably slower than the rest of retail spending, up 7.7%. These trade exposed retailers also experience much more cyclical demand than the non-trade exposed, and likely have a more variable cost base due to fluctuations in exchange rates and costs of goods.
A trade war would be bad for both local New Zealand businesses and consumers. As a small island nation with not a lot of our own production, we rely heavily upon this trade for continued prosperity. Hopefully rhetoric between the US and China will be toned down and cooler heads will prevail, allowing for the continued smooth operation of global trade and local retail.
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