Donald Trump holds the executive order introducing worldwide tariffs. Photo: SAUL LOEB
With China and the US promising trade war escalations, it could be five to 10 years before the world adjusts to Donald Trump's tariffs, former Reserve Bank economist Michael Reddell says.
Other economists have drawn parallels with the Great Depression, and say New Zealand should be preparing now for a downturn.
US President Donald Trump on Tuesday threatened to increase China's tariffs to 104 percent if it fails to back down from its own retaliatory tariffs. Beijing in return has vowed not to bow to "blackmail" and promised to "fight to the end".
Reddell told RNZ an increasingly likely global recession would resemble the 2008 global financial crisis more than recent shocks, made worse by already inflated unemployment levels.
"We didn't have a domestic financial crisis, the US had one - but we still caught the brunt of that slowdown in economic activity.
"You could easily see world GDP - that this year was forecast to be perhaps 2.5 to 3 percent growth - going to zero or materially negative ... so, something more severe than the recessions that we've already been in and out of over the last 18 months - and that's from a starting point where the unemployment rate has already increased to 5 percent."
Former Reserve Bank economist Michael Reddell says it could be five to 10 years before the world adjusts to Donald Trump's tariffs. Photo: Supplied
Simplicity chief economist Shamubeel Eaqub said the "opening salvos" from the US and China meant "we are now in the grips of this tariff war and trade war".
"That's why markets have fallen so much, because there is so much uncertainty and there's a real fear that it will lead to a big slowdown in the global economy."
He said New Zealanders saving for retirement should remember the biggest contribution to those funds was making regular savings, and ensuring they were in a fund that fitted their circumstances.
Exporters should be strategising for slowing demand, he said. Things might look good in the short term because of low US tariff rates relative to other countries - but it was not likely to last.
"New Zealand has a little bit of reprieve in terms of just in the next few months - we might be able to get a bit of market share - but we should be getting ready for a wider kind of fallout because of this high tariff affecting demand in many of these large economies."
NZ Initiative chief economist Eric Crampton pointed to the effects on New Zealand's biggest export - dairy - to its largest trading partner, China.
"They're our number one trading partner currently, if their products are substantially tariffed by the United States, China gets poorer; they are less able to afford the things that we sell them. Unfortunately, America also gets poorer, and they're also then less able to afford the things that we sell them."
He said with the rules being upended, it was hard to make predictions - but the odds for a recession in the US were odds-on likely.
"Pretty disappointing, [considering] Trump came into office with a pretty strong economy ... if it's compounded by ongoing regime uncertainty and ongoing waves of tariffs, then it could be deeper than that, but I wouldn't want to put a number on it."
Economist Eric Crampton says it's hard to make predictions - but the odds of a recession in the US are likely. Photo: Supplied
Reddell said the effects of global recession for New Zealand tended to be lower commodity prices, fewer tourists, and fewer international students; business investment was particularly likely to suffer, and not just domestically.
"If you're a business person - really anywhere but particularly in those big economies or Vietnam or Japan or Korea that are caught up with high tariffs - you'd be saying no to any new investment plan.
"That alone, combined with the nervousness of consumers facing higher prices and uncertainty about their jobs, means that, yeah, we could have a very nasty slowdown."
'It could be very bad'
Crampton harkened back to the Great Depression, saying some of the settings were similar.
"The initial cause of the Great Depression wasn't tariffs, it was a faulty monetary policy - but the tariffs had a few effects, they made everyone poorer. The sets of retaliatory tariffs made it hard for people to make investment decisions, and that was compounded in that instance, by ongoing policy uncertainty in the United States.
"That's the worrying dynamic here, where Trump's tariffs are breaking most of the rules that have been established for decades, whether they're going to be on again or off again is always up in the air."
"The parallel here is that we've got the waves of tariffs ... there's going to be an unwinding of the sets of trading relationships ... compounded with ongoing additional policy uncertainty in the United States and potentially China going to war with Taiwan.
"It could be very bad. It would be surprising if we avoided a recession at least in the United States this year, New Zealand is in better shape than other countries, but it's still overall pretty bad."
He said how long it took New Zealand to recover "depends on how long it takes for the American administration to really come to its senses".
"If that regime remains fundamentally unpredictable for a very long time, there will be a sharp depression in investment in the United States and consequent reductions in consumer spending and less demand for New Zealand products."
The same effect would apply to China and other Asian countries, having "very serious consequences" for New Zealand's exports and global trade, he said.
Fears over European tariffs on China
Reddell said the US and China escalating the trade war would only make things worse - but that could improve in about five to 10 years.
"The more these things build, the more overall pain and dislocation and short term cost there is," he said.
China was more of a concern for New Zealand because of its size than merely because of its status as our largest trading partner. He said Beijing was in a more difficult position than when it took the "big bazooka" approach to the GFC crisis - a US$586 billion stimulus package.
"They've got more debt problems. They've got more of an overhang of excess investment from the last decade. So they're limited, probably, in what they can do."
While global exporters may look to other markets like Australia and New Zealand, that could also risk escalating tariffs - for instance if Chinese exporters began sending goods to Europe instead of the US, the EU may look at tariffs on China to protect their own manufacturing industries.
But it was not all doom and gloom.
"If we move to a world where all the big blocks - China, the US and Europe - had 50 percent tariffs on each other, and that was a permanent feature of their economies, we'd all be poorer as a result, but economies would still grow. Societies are still innovating. Businesses are still investing.
"The US had really high tariffs coming out of World War II for example, and that was a period of very strong growth for us and a bunch of other economies."
But until that stage was reached, "the dislocation of getting from where we've been - largely free trade - to much higher tariffs is going to be enormously painful ... having to relocate production plants to different places, to reorganise supply chains and those sorts of things, it wouldn't be surprising if that took at least five years to work its way through. I mean, this is a really huge economic policy dislocation."
Economist Shamubeel Eaqub wants to see the government moving from a period of austerity to instead boosting the economy. Photo: Supplied
What New Zealand could do to prepare
Reddell said there was little New Zealand could do to affect the US-China showdown.
"We're in that sort of situation - when the elephants fight, the grass gets squashed," he said.
"I think we sort of want to stand together with a bunch of small, advanced democracies in favouring free trade - perhaps not needlessly antagonising Trump, but equally not being obsequious."
Eaqub agreed, saying that was the most important thing the country could do, while also keeping diplomatic channels open to try to reduce tariff effects from the US.
"We also want to see the government moving from a period of austerity to a period of actually boosting the economy, because when there is so much risk and uncertainty around the global economy, we cannot be pursuing austerity - it's madness."
Crampton said Prime Minister Christopher Luxon's message criticising tariffs was "spot on".
"It was less about trying to convince Trump that his tariffs are wrong - because he'll never listen to us on that. It was more about reasserting commitments to the norms that have held well for everyone for decades, and trying to build that coalition of countries that remain committed to open trading orders."
