How might the Trump tariffs impact Craigmore’s agricultural investments? As the U.S. pivots toward a more Mercantilist trade stance with new tariffs from April 2025, countries like New Zealand face both risks and opportunities. This Commentary explores the potential impact on Craigmore’s investments, global trade dynamics, and macroeconomic stability — and asks whether a return to protectionism is here to stay? What is Mercantilism? Mercantilist countries seek to orient their economy toward winning in export markets, and do not like importing goods as they see this as a leakage of resources. In contrast to this, the US along with the UK, Canada, Australia and NZ have traditionally had a “Ricardian” view of trade. That nations and companies should specialise in what they are good at. That trade between such nations will generate mutual gains. Should the Anglo countries have been more Mercantilist? A problem with this approach is countries that specialised e.g. the US in tech and finance; NZ in agriculture and forestry, saw jobs in manufacturing shift offshore. Creating left-behind communities. Even so, until now the Anglo countries continued to believe that the gains from trade (and from global prosperity) off-set the challenges of industrial blight and of associated trade deficits. New US tariffs from 2 April 2025 At least in the US this has changed. The US has decided to attempt to boost domestic activity by erecting a tariff wall around its economy. A minimum 10% tariff has been imposed on all countries. With UK, Aust. and NZ being told this will be their rate. The US’s new 10% base tariff is at a similar level to the EU’s import tariffs. Which are just over 10% on average, but which rise to 32% for e.g. dairy products. However, ever the global policeman, the US has decided to impose higher tariffs on countries whose trade is in significant surplus with the US. e.g. China will suffer a 34% increase, so that total US tariffs on imports from China will now be at least 54%. While US tariffs on the EU will be 20%. In effect the US is seeking to punish Mercantilists in other regions. Sector tariffs are also being announced that over-ride the base tariffs. e.g. imports of cars into the US will face a 25% tariff. This has led the UK’s Jaguar-Land Rover to announce it will suspend exports to the USA. Responses to the tariffs In the face of higher tariffs some surplus countries, e.g. Vietnam, have capitulated and offered to eliminate their own tariffs on imports from the US. In contrast, China has immediately retaliated by imposing 34% tariffs on imports from the US. Including e.g. the alfalfa animal feed that has been travelling in otherwise largely empty containers returning from the US West Coast. This will raise costs of the domestic Chinese dairy sector. Meanwhile stock market investors do not like what they are seeing. They have three concerns: Some companies are directly impacted, e.g. Apple makes 90% of iPhones in China, but must now pay significant tariffs to bring them into the US. As “gains from trade” diminish it is likely that global growth will slow. Some countries may go into recession. e.g. many economists now forecast that the US may go into recession if the policies are not modified. Both equity and debt capital markets may be strained. It is not too dramatic a comparison to say stresses similar to the 2008 Financial Crisis may return*. At a macro level export-oriented nations may have less surplus funds to recycle into capital markets of countries running deficits. More directly there is a risk companies directly challenged by the tariffs, e.g. Jaguar-Land Rover, may be required to restructure. Or at least to raise capital to build car assembly in the US. This will lower returns, create demand for capital, and in some cases create debt default events that could reduce confidence and trust in world financial systems. Why did the White House make this change? Especially after China joined the WTO in 2001, a lot of factory work formerly carried out in countries like the US and UK shifted to places like China and Vietnam. The new Trump administration is seeking to “Make America Great Again” by giving companies incentives to create jobs in the US. As noted, countries they regard as having engaged in unfair trade competition are being punished with higher tariffs. A major shift in international trade relations 1929 marked the end of the ebullient, free trading 1920s. Which were followed by bank failures and the Great Depression. The suffering which this caused in turn contributing to the nationalisms (including tariffs) of the 1930s. Soul searching about the causes of the Second World War then caused the western nations to establish a free-trade oriented system after 1945. That was progressively widened to include emerging economies. So far 2025 feels similar to the aftermath of 1929. If the US really has become Mercantilist this would shift the balance of international trade away from the 1945 to 2025 “gains from trade” philosophy toward the 1930s “beggar thy neighbour” approach. Is the world destined to veer between free trade and Mercantilist approaches, over long sweeps of history? What may happen next? Slower global growth could pose risks for NZ if current steady demand growth for dairy and fruit products was to also to slow. This is possible, as nations may simply have less foreign exchange to spend on imports. However, more positively, China and other Mercantilist nations are being urged to rebalance their economies toward consumption. If so, this may help grow their middle classes, and so consumption of NZ food products. Also, of course, nations will always seek to feed their populations, ahead of other priorities. There is also a good chance of some policy relaxation by the US government. Where negotiations such as those already underway with Vietnam lead to US tariffs on imports being relaxed. If so, this may off-set some of the anticipated slowdown. In a perfect world the “global policeman” does his work and, ironically, uses the threat of US Mercantilism to bring the world trading system to a less Mercantilist place. This is the approach thinkers like Elon Musk are advocating. Using the leverage of the Trump tariffs to create a free-trading zone between key western countries, starting with the US and the EU. The art of the deal, indeed! The price of risk We learned in the 2008 financial crisis that if financing becomes unstable this can impact the real economy. As a result, even us farmers are currently fixated on stock market indices; currencies; interest rates; and credit pricing. If e.g. the debt capital markets go into a panic, might unavailability of financing exacerbate growth risks?*. Or, if President Trump begins to strike deals with former Mercantilists who now see the error of their ways, might this help improve sentiment? How will this impact Craigmore? New Zealand’s primary exports to the U.S. include beef, dairy, wine, and apples — all of which may be affected by tariff-induced price shifts. Fortunately, diversified demand across Asia and the EU provides alternative market access. NZ exports 15% of its farm and forest products to the US. Therefore, direct impact of the new tariffs on NZ exporters will be approximately 1.5% of the value of NZ Agri-forest exports. This first order effect appears manageable for three reasons: New Zealand grows products which can be sold in multiple markets (e.g. NZ exports dairy products to 65 countries). So, they can be directed away from the US if necessary, As noted in other Craigmore Commentaries, interest rates in NZ have fallen after demand for credit and inflation fell at the end of a 15-year property boom. Because of falling interest rates, the NZ$ has fallen against major currencies. This depreciation (to NZ$ levels last seen 20 years ago) has been painful for Craigmore’s investors, who measure returns in their own currencies. However, since most international food and fibre produce markets are denominated in US$ and have remained firm even in the face of the current turmoil, this has had the effect of elevating farm and orchard ROA’s to over 10% – a figure we expect will be common across NZ agriculture this year, due to both firm commodity pricing and the lower NZD. These strong returns will help NZ farming systems absorb any commodity price volatility that may be associated with changes in trade flows. Trade disruption may also bring opportunities to food producers. e.g. US fruit exporters are already being blocked from China. Also, NZ is now the second largest external source of wine for the US, after France. Which now faces a 20% levy in contrast to the 10% rate on New Zealand wine (recently, New Zealand’s Trade Minister, Todd McClay, acknowledged the U.S. tariff implementation, stating that while the 10% tariff is significant, New Zealand remains competitive in the U.S. market compared to other countries facing higher tariffs). However, perhaps the larger risk is whether recessions resulting from the new phase of international trade will lead to lower demand? The preliminary answer to that is also reassuring. The protein, fruit and fibre products that NZ produces are necessities. Once people get used to having yogurt or kiwifruit on their breakfast this continues. Even if they cut back on more discretionary purchases. Will it pay to become Mercantilist? New Zealand continues to rely on multilateral and bilateral trade agreements, such as the CPTPP and the recent EU-NZ free trade deal, to ensure broad market access. Staying open, not protectionist, appears to be the strategic path. In sum the US has, at least for the moment become strongly Mercantilist. And Canada may go the same way by threatening the US with tit for tat tariffs. Yet numerous countries and sectors are already in negotiation with the US to improve their position. It is possible that soon a drip of positive news stories, of deals being struck and tariffs being lowered, may help restore confidence. New Zealand and Australia, meanwhile, may be wise not to follow Canada and China by imposing tariffs on imports. It is not in the interests of a small country with limited labour resource like NZ to attempt to foster e.g. car manufacturing behind a tariff wall. Instead, with the US punishing Mercantilists, I expect New Zealand will keep its head down and continue focusing on what it is good at, with 82% of exported goods already coming from farming and forestry. Land in New Zealand and bottled water anyone? In previous market meltdowns, as once again world systems of prosperity threatened to unravel, a humorous question asked on London trading floors was “Land in New Zealand and bottled water anyone?”. Might this question be again on the lips of astute investors? e.g. Craigmore is now seeing significant US investment capital flowing into NZ agriculture. Land will always be there, and what it produces will always be needed. As always comments and suggestions gratefully received. Warm regards, Forbes, Che, Nick and the Craigmore team *P.S. Possible monetary policy responses One worrying issue is how might the US Federal Reserve react if financing markets dry up? In 2008 and 2009 the Fed became the “global lender of last resort”. Providing liquidity to the banking systems of other countries. In the current more nationalist policy environment, will the Fed still feel it has a mandate to do that? More generally, having over-expanded money supply during COVID, how rapidly might central banks ease in a possible 2025 slow down? No doubt they will be more careful than during COVID. However, even so, we can be confident they’ll ease. Indeed, after the events of the past few days, markets are now pricing sharp central bank rate cuts over the next three to 12 months. Given how challenging things could become, it seems possible rates could be reduced right down to where they were 10 years ago (and then again briefly during COVID) with central bank rates at extremely low levels. This is what happened in the 1930s. However, what a lot of people forget is that in the Depression, while rates on US Treasuries went to 0%, corporate borrowers were still paying 10% and this is what led to so many of them failing. This is why it is crucial that central bank support is available to help banks and corporates through the current volatility. If that is not made available, then there could be some dreadful unintended consequences of the Trump tariff shock. The worst case nightmare of investors being a return of the global credit melt-down that threatened in 2008-9 but which was (just!) averted when the banks were bailed out. Might a global de-leveraging (a credit bust) be allowed to happen this time? If so, to return to our old theme, might low leverage investments in productive land in a safe country be a thought? If you have any questions about the report or any other farming matter, please contact us at the email addresses below. Forbes Elworthy Founder forbes.elworthy@craigmore.com Che Charteris CEO che.charteris@craigmore.com Nick Tapp Chairman CS LLP nick.tapp@craigmore.com DISCLAIMER The information contained in this document is confidential and is supplied to you solely for your own information. This document may not be copied or further distributed to any person or published, in whole or in part, for any purpose. The responses expressed herein are those of Craigmore Sustainables LLP and are subject to amendment or revision at any time based on market and other conditions. Forecast and forward looking statements are based on the reasonable beliefs of Craigmore Sustainables LLP and are not a guarantee of future outcomes. No representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information or opinions contained in this document. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. Any performance indications are estimates only and actual results may differ materially from those described herein. This article should not be construed as marketing or promotional material of any Craigmore products. Craigmore products are only suitable for ‘Professional Investors’ as described by the Financial Conduct Authority in the FCA handbook COBS 3. We may collect limited contact information on you. How we store, use and secure that information can be found in our Privacy Policy. Published: 11 April 2025
