Economic Effect of Tariffs
This post presents the effect of tariffs on economic and social conditions as well as the effect on inflation and economic downturns.
I applaud the New Zealand Government of Aoteoroa across all parties to not retaliate but, it is also a good opportunity for us to review our own tariff policies.
The first part of this article presents New Zealands own tariff policy. Interestingly, we applt GST to all imports and this is considered to be a tariff.
GST should not be applied to imports. When sold I would imagine another amount of GST is applied but I am not sure about this.
# Tariff Policies and Economic Implications in New Zealand: A Comprehensive Analysis
New Zealand maintains a relatively open trade regime characterized by low tariffs and a focus on bilateral and multilateral trade agreements. Over 99% of goods imported into the country face no tariffs, with most duties ranging between 0% and 10% for select product categories such as textiles, footwear, and processed foods [1] [3] [4]. However, recent geopolitical developments, including the United States’ imposition of a 10% baseline tariff on New Zealand exports, have introduced new complexities to the nation’s trade landscape [5] [7] [9]. This report examines New Zealand’s tariff structure, its economic and social implications, and the interplay between domestic policies and global trade dynamics.
New Zealand’s Tariff Framework and Duty Rates
Overview of Tariff Classifications
The Tariff of New Zealand, aligned with the Harmonized Commodity Description and Coding System, determines duty rates based on product type, origin, and shipment source [1] [4] [11]. Approximately 95% of imported goods enter duty-free, reflecting the country’s commitment to free trade principles [3] [12]. Residual tariffs of 5% or 10% apply to specific sectors:
– Textiles and apparel: 10% duty on select garments and fabrics to protect domestic manufacturers [3] [4].
– Footwear: 10% tariff on non-FTA partner imports, though concessions exist for materials lacking local alternatives [1] [11].
– Processed foods: 5–10% levies on items like preserved fruits and dairy substitutes [3] [4].
– Steel and plastics: 5% duties on certain industrial inputs, mitigated by tariff concessions for residential construction materials [3] [11].
Notably, passenger vehicles, electronics, and machinery face no tariffs, aligning with policies to reduce input costs for businesses [4] [12].
Preferential Trade Agreements and Tariff Concessions
New Zealand’s network of 15 free trade agreements (FTAs) enables preferential tariffs for partner nations, including:
– Australia: Zero tariffs under the Closer Economic Relations agreement [3].
– China and ASEAN nations: Phased reductions, with 99% of goods now duty-free [3] [13].
– CPTPP countries: Elimination of 95% of tariffs on industrial and agricultural exports [13].
The Tariff Concession Scheme further reduces duties for goods with no domestically produced equivalents, benefiting sectors like construction and specialty manufacturing [1] [11]. For instance, imported solar panel components not made locally may receive full duty exemptions under this system [1] [6].
GST and De Minimis Thresholds
Goods and Services Tax (GST)
All imports incur a 15% GST, calculated on the CIF value (cost + insurance + freight) plus any applicable duties [2] [6] [8]. For shipments valued under NZ$1,000, Customs waives duty but still collects GST unless the overseas supplier has already remitted it under the *GST on Low-Value Imported Goods* rule [2] [6] [12]. This threshold excludes alcohol and tobacco, which face excise taxes regardless of value [2] [8].
Economic Impact of GST on Trade
The 15% GST contributes significantly to landed costs, particularly for consumer goods. For example, a NZ$800 electronic device purchased overseas incurs NZ$120 GST, raising the total cost to NZ$920 [6] [8]. Critics argue this functions as a de facto trade barrier, a perception that may have influenced the U.S. Trump administration’s erroneous claim of a 20% New Zealand tariff rate on American goods [5] [7] [10].
Recent Trade Developments: The U.S.–New Zealand Tariff Dispute
The 2025 Reciprocal Tariff Announcement
On April 2, 2025, the U.S. imposed a 10% baseline tariff on all New Zealand exports, citing “reciprocal measures” against perceived trade imbalances [7] [9] [10]. This decision stemmed from a flawed U.S. assessment that inaccurately conflated New Zealand’s 15% GST with tariff rates, erroneously claiming a 20% barrier against American goods [5] [7] [10]. In reality, the average tariff on U.S. imports to New Zealand is 1.9%, with 99% of products entering duty-free [9] [10].
Implications for New Zealand Exporters
– Direct costs: The 10% U.S. tariff could add approximately NZ$900 million annually to export costs, affecting key sectors like dairy (NZ$1.8 billion in 2024 exports) and meat (NZ$2.1 billion) [7] [9].
– Competitive displacement: Chinese and EU exporters, facing higher U.S. tariffs of 34% and 20% respectively, may redirect goods to markets New Zealand serves, intensifying price competition [7] [10].
– Inflationary pressures: U.S. importers are likely to pass tariff costs to consumers, potentially reducing demand for premium New Zealand products like Manuka honey and lamb [9] [10].
Despite these challenges, Trade Minister Todd McClay ruled out retaliatory tariffs, noting such measures would harm New Zealand consumers through increased prices [9] [10].
Sector-Specific Tariff Policies
Agriculture and Processed Foods
While most agricultural imports face no tariffs, processed items attract duties to protect domestic processors:
– Cheese: 5% tariff on non-FTA imports, waived for Australian products under CER [3] [4].
– Canned fruits: 10% duty unless sourced from ASEAN or Chinese partners [3] [13].
– Wine: No tariffs, but excise taxes of NZ$2.27 per liter apply equally to domestic and imported products [2] [4].
Automotive and Industrial Goods
New Zealand’s tariff-free regime for vehicles (excluding a NZ$3,000 fee for high-emission models) has spurred a used import market, with Japanese cars constituting 68% of registrations [4] [12]. However, the 2023 *Waste Minimisation (Tyres) Regulations* introduced a NZ$5.75 levy per tyre to fund recycling programs [1] [6].
Strategic Recommendations
1. Clarify GST-Tariff Distinctions: Proactively engage trading partners to differentiate GST from protectionist measures, preventing misclassification in future trade assessments [5] [7] [10].
2. Expand FTA Networks: Prioritize agreements with high-tariff nations like India (current average: 26%) to secure preferential access for dairy and horticulture exports [7] [13].
3. Enhance Concession Transparency: Streamline the Tariff Concession application process, particularly for renewable energy components, to reduce compliance costs [1] [11].
4. Monitor U.S. Trade Policy: Establish a joint NZ-US working group to address the 2025 tariff’s implementation details, including whether it applies cumulatively with existing duties [9] [10].
Conclusion
New Zealand’s tariff framework balances open trade principles with targeted protections for vulnerable industries. While the 10% U.S. tariff introduces short-term challenges, the nation’s low-duty regime and robust FTA network position it to adapt to shifting global trade dynamics. Ongoing dialogue to rectify the GST-tariff misperception, coupled with strategic concessions for green manufacturing inputs, could further solidify New Zealand’s role as a proponent of equitable international trade.
Citations:
[1] https://www.customs.govt.nz/business/tariffs/
[2] https://www.customs.govt.nz/personal/duty-and-gst/duty-and-allowances/
[3] https://www.mbie.govt.nz/business-and-employment/business/trade-and-tariffs/tariffs-in-new-zealand
[4] https://www.trade.gov/country-commercial-guides/new-zealand-import-tariffs
[6] https://flavorcloud.com/knowledge-base/new-zealand-country-guide-import-and-landed-cost-reference/
[8] https://www.customs.govt.nz/personal/duty-and-gst/whats-my-duty-estimator/
[10] https://www.1news.co.nz/2025/04/03/trade-minister-tariffs-not-good-for-trade-nz-wont-retaliate/
[11] https://www.customs.govt.nz/business/tariffs/tariff-classifications-and-rates/
[12] https://zonos.com/docs/guides/country-guides/new-zealand
[13] https://www.tariff-finder.govt.nz
[14] https://www.wto.org/english/res_e/statis_e/daily_update_e/tariff_profiles/nz_e.pdf
[15] https://www.easyship.com/en-hk/duties-and-taxes-calculator/newzealand
Tariffs have significant economic and social impacts, affecting various aspects of society, including consumers, businesses, and international relations.
Here’s an overview of these impacts along with historical case examples:
Economic Impacts
1. Price Increases: Tariffs often lead to higher prices for imported goods, as importers pass on the costs to consumers. This can reduce consumer purchasing power and increase inflation [2] [4].
2. Employment and Output: While tariffs may protect certain domestic industries and create jobs in those sectors, they can also lead to job losses in industries that rely heavily on imported inputs. Overall, tariffs tend to reduce economic output and employment [1] [4].
3. Trade Disruptions: Tariffs can disrupt global supply chains, leading companies to shift production to other countries to avoid tariffs. This can result in significant economic costs and uncertainty [4].
4. Revenue Generation: Tariffs generate revenue for governments but can reduce dynamic tax revenues due to decreased economic activity [1].
Social Impacts
1. Income Distribution: Tariffs often have a regressive effect, disproportionately affecting lower-income households who spend a larger portion of their income on basic necessities [2].
2. Business Challenges: Small businesses, particularly those reliant on imported materials, face significant challenges due to increased costs and reduced competitiveness [2].
3. International Relations: Tariffs can strain international relations, leading to retaliatory measures and trade wars, which can further exacerbate economic and social impacts [5].
Historical Case Examples
1. The Chicken War (1960s)
– Background: The U.S. and Europe had a trade dispute over chicken exports. European nations imposed tariffs on U.S. chicken, leading to a sharp decline in U.S. exports.
– Impact: The U.S. retaliated with tariffs on European products, creating a long-standing “chicken tax” that continues to affect trade dynamics [5].
2. The Lumber War with Canada (1982)
– Background: The U.S. accused Canada of unfair practices in the softwood lumber industry, leading to ongoing tariffs.
– Impact: Canadian lumber continues to face significant tariffs in the U.S. market, affecting trade relations and economic outcomes [5].
3. Trump’s Tariffs on Solar Panels and Washing Machines (2018)
– Background: The Trump administration imposed tariffs on imported solar panels and washing machines to protect domestic industries.
– Impact: The tariffs led to increased prices for consumers and mixed outcomes for domestic producers. For example, while some jobs were created in the washing machine sector, the cost per job was high, and domestic producers raised their prices rather than competing with imports [6].
4. The U.S.-China Trade War (2018-2019)
– Background: The U.S. imposed significant tariffs on Chinese imports in response to perceived unfair trade practices.
– Impact: China retaliated with tariffs on U.S. goods, leading to increased prices, reduced employment in affected sectors, and significant disruptions in global supply chains [2] [4].
These examples illustrate the complex and often negative economic and social impacts of tariffs, highlighting the need for careful consideration in trade policy decisions.
Citations:
[1] https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/
[2] https://www.investopedia.com/news/what-are-tariffs-and-how-do-they-affect-you/
[3] https://en.wikipedia.org/wiki/History_of_tariffs_in_the_United_States
[4] https://www.richmondfed.org/publications/research/economic_brief/2025/eb_25-12
[7] https://www.ucdavis.edu/magazine/how-could-tariffs-affect-consumers-business-and-economy
[8] https://www.bbc.com/news/articles/cq80vwj2092o
[9] https://www.bbc.com/news/articles/cn93e12rypgo
[11] https://www.reuters.com/markets/trump-tariffs-pile-stress-ailing-world-economy-2025-04-02/
[12] https://www.aei.org/economics/the-economic-consequences-of-mr-tariff-man/
[13] https://www.bbc.com/news/articles/czd35l8995eo
[15] https://thoughtleadership.rbc.com/what-is-the-impact-of-tariffs-on-the-us-economy/
[16] https://www.allianzgi.com/en/insights/outlook-and-commentary/tariffs-global-economic-impact
[19] https://treasury.gov.au/sites/default/files/2019-11/foi-2549.pdf
[21] https://ideas.repec.org/p/oec/envaaa/166-en.html
[23] https://www.reuters.com/world/trump-stokes-trade-war-world-reels-tariff-shock-2025-04-03/
[26] https://www.worldbank.org/en/research/brief/hit
[28] https://insight.factset.com/historical-lessons-how-new-tariffs-could-affect-financial-markets
[33] https://www.piie.com/blogs/realtime-economics/2025/historic-significance-trumps-tariff-actions
[36] https://www.investopedia.com/terms/t/trade-war.asp
[37] https://www.wto.org/english/res_e/booksp_e/trade-costs-incl-growth_chap3_e.pdf
[40] https://history.state.gov/milestones/1921-1936/protectionism
[42] https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs
[43] https://www.imf.org/-/media/Files/Publications/WP/2019/wp1909.ashx
[44] https://www.cbsnews.com/news/which-products-most-affected-tariffs/
[45] https://one.oecd.org/document/ENV/WKP(2020)13/En/pdf
[46] https://www.aeaweb.org/articles?id=10.1257%2Fjep.33.4.187
[47] https://news.darden.virginia.edu/2025/02/04/qa-what-are-tariffs-and-how-will-they-affect-us/
[48] https://www.aston.ac.uk/latest-news/global-cost-2025-tariff-war-could-reach-14-trillion
Tariffs can significantly affect inflation rates by increasing the costs of imported goods and services. Here’s how tariffs influence inflation:
1. Direct Price Increases: Tariffs directly raise the prices of imported goods by adding a tax on them. Businesses often pass these increased costs on to consumers, leading to higher prices for goods and services [2] [4] [7].
2. Intermediate Goods: Tariffs on intermediate goods (components used in production) can have a persistent effect on inflation. These increased costs reduce production efficiency and lead to higher marginal costs, which are then reflected in higher consumer prices [1].
3. Supply Chain Disruptions: Tariffs can disrupt global supply chains, leading to shortages and further price increases. This is particularly true for goods with complex supply chains, such as electronics [1] [8].
4. Economic Models and Estimates: Economic models suggest that significant tariff increases can add between 0.5 and 2.2 percentage points to core inflation rates, depending on the scope and response of markups [2] [4]. For instance, a scenario with a 60% tariff on Chinese imports and a 10% tariff on other imports could increase core inflation by up to 2.2 percentage points [4].
5. General Equilibrium Effects: While initial estimates focus on direct price impacts, broader economic adjustments (such as changes in consumption patterns, exchange rates, and monetary policy) can modify these effects over time [4] [6].
In summary, tariffs can lead to higher inflation by increasing the costs of imported goods and disrupting supply chains. However, the magnitude of the effect depends on various factors, including the level of tariffs, the response of businesses and consumers, and broader economic conditions.
Citations:
[2] https://www.cnbc.com/2025/04/01/trump-tariffs-effect-on-consumer-prices-debated-by-economists.html
[6] https://www.morningstar.com/economy/tariffs-will-reduce-us-gdp-are-unlikely-reduce-trade-deficit
[7] https://www.cnbc.com/video/2025/04/01/how-tariffs-affect-inflation-rates-in-the-us.html
[8] https://www.reuters.com/world/trump-stokes-trade-war-world-reels-tariff-shock-2025-04-03/
[10] https://www.bbc.com/news/articles/cn93e12rypgo
Tariffs have historically contributed to economic downturns by disrupting trade, increasing prices, and prompting retaliatory measures from other countries. Here are some notable examples:
1. The Smoot-Hawley Tariff Act (1930)
– Background: This U.S. legislation raised tariffs on imported goods by about 20%, aiming to protect American businesses and farmers during the Great Depression.
– Impact: The act triggered a global trade war as many countries retaliated with their own tariffs. International trade declined sharply, exacerbating the Great Depression. U.S. imports and exports fell significantly, and global trade decreased by about 66% between 1929 and 1934 [1] [5].
2. The Fordney–McCumber Tariff (1922)
– Background: Signed by President Warren G. Harding, this tariff increased the average American ad valorem tariff rate to 38%.
– Impact: Trading partners responded with their own tariffs, which contributed to a customs war. This was seen as one of the factors leading to the Great Depression, as it reduced access to foreign markets and invited retaliatory tariffs [6].
3. The German–Polish Customs War (1925-1934)
– Background: Germany increased tolls on coal and steel from Poland to pressure Poland into territorial concessions.
– Impact: Poland retaliated by raising tolls on German products, leading to economic hardship and the development of alternative trade routes for Poland [6].
4. Trump’s Tariffs (2018-2019)
– Background: The Trump administration imposed significant tariffs on Chinese imports, among others, leading to a trade war.
– Impact: The tariffs increased prices for U.S. consumers, reduced economic output, and led to retaliatory tariffs from China and other countries. While not causing a recession, they contributed to economic uncertainty and reduced employment in certain sectors [3] [4].
These examples illustrate how tariffs can lead to economic downturns by reducing trade, increasing prices, and prompting retaliatory actions from other nations.
Citations:
[1] https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act
[2] https://www.usatoday.com/story/money/2025/04/02/trumps-sweeping-tariffs-recession/82780969007/
[3] https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/
[4] https://www.npr.org/2025/03/06/nx-s1-5318076/tariffs-great-depression-explainer
[5] https://www.investopedia.com/terms/s/smoot-hawley-tariff-act.asp
[6] https://en.wikipedia.org/wiki/Trade_war
[8] https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs
[11] https://thoughtleadership.rbc.com/what-is-the-impact-of-tariffs-on-the-us-economy/
[16] https://www.investopedia.com/terms/t/trade-war.asp
[18] https://history.state.gov/milestones/1921-1936/protectionism
[19] https://www.redalyc.org/journal/6923/692374308002/html/
[20] https://en.wikipedia.org/wiki/History_of_tariffs_in_the_United_States
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