The government’s relief that New Zealand seems to have escaped a bullet regarding President Trump’s tariffs may be short lived. New Zealand exporters will face a flat 10 percent tariff on goods sent to the United States, but that is at the lower end of the scale of tariffs Trump has imposed on other countries.
However,
that may not be where New Zealand’s tariff travails end, if history and the
experience of other countries is any guide.
In
recent days, Trump has turned his attention to the international pharmaceutical
industry, suggesting it was time to apply tariffs to pharmaceuticals because
America “doesn’t make anything” in terms of drugs and medicines. He has
particularly singled out Ireland, telling the country’s Prime Minister at the
White House recently that "all of a sudden Ireland has our pharmaceutical
companies, this beautiful island of five million people has got the entire US
pharmaceutical industry in its grasp."
America
is currently Ireland’s major export market, receiving around 28% of all its
exports. Around two-thirds of Ireland’s exports to America are pharmaceutical
products, manufactured by American companies operating under licence in
Ireland. The Irish economy is therefore especially vulnerable to any new
tariffs (potentially as high as 25%) Trump may impose on pharmaceuticals.
New
Zealand has no pharmaceutical manufacturing industry to speak so therefore is
not vulnerable to tariffs in this way. But it does have the government’s drug
procurement agency, PHARMAC, which America has long regarded as
anti-competitive in relation to American products entering the New Zealand
market.
PHARMAC
was established in 1993 to arrange the purchase and supply of the medicines New
Zealanders need. Its centralised approach and tough, single price negotiating
stance has infuriated pharmaceutical companies the world over, arguably driving
those that were operating in New Zealand at the time to move offshore. While
PHARMAC has also been the recipient of constant local professional and
political criticism for its hard-line approach, it has gained grudging
recognition for the part it has played in keeping the country’s overall
medicines bill under reasonable control.
However,
America has been one of PHARMAC’s most constant and vehement critics,
frequently citing its existence – let alone its operation – as a significant
barrier to wider trade liberalisation between the two countries. On more than
one occasion America has called for the paring back of PHARMAC’s role as the
price of any form of freer trading arrangement between the two countries. To their credit, successive New Zealand governments,
have always resisted that pressure.
While
PHARMAC does not appear to have been raised during the recent tariff
discussions, it seems, given the recent comments about Ireland, only a matter
of time before it is. With its preference for substituting cheaper generic
drugs for brand-name drugs where feasible, PHARMAC could well be viewed by the
Trump Administration as an impediment to the profitability of the American
pharmaceutical industry in just the same way it views Ireland’s pharmaceutical
manufacturing industry.
And
if tariffs are to be imposed on Irish pharmaceutical exports to America, as
seems highly likely, New Zealand should prepare for some sort of tariff
imposition to blunt PHARMAC’s impact on the profitability of American
pharmaceutical companies supplying to the local market. Because there is no New
Zealand based pharmaceutical industry to speak of, any response from America
will likely be retaliatory across a range of unrelated sectors but aimed at
putting domestic political pressure on the government to bring PHARMAC to heel,
the way America wishes.
In
a word, it would be a case of good old-fashioned bullying, a trade practice
America has frequently relied on over the years. In the late 1990s and early
2000s, New Zealand liberalised considerably its laws regarding parallel
importing. Parallel importing is the practice of allowing the legal importation
of genuine branded goods into a country without the consent or authorization of
the brand owner or the official distributor in that market. Parallel imported
goods are often cheaper on the retail market than the same goods supplied by
the brand owner or official supplier. America lobbied the government of the day
and individual politicians extremely hard against parallel importing, which it
saw as detrimental to American brand owners, but to no avail.
Many
of the arguments now being run by the Trump Administration that American
manufacturers have been “ripped off” by cheap imports for years, which is why
protective tariffs are now required, are very similar to those raised 25 years
ago when parallel importing was an issue. In the current climate, there is no
guarantee they will not be raised again insofar as New Zealand is concerned.
Against
that backdrop, therefore, and given what seems to be a fast-moving
international situation any sense of relief here that New Zealand has escaped
the worst of the tariff impositions would be unwise. The recent tariff
announcements seem unlikely to be the end of the matter. Trump likes to boast
of the number of countries that have apparently approached the White House in
the wake of the tariff announcements seeking new more- America friendly trade
agreements instead of tariffs.
This
makes it clear his wider agenda is to reshape the entire global trading
structure away from the free trade emphasis that has dominated international
trade discussions since the late 1980s. Trump not only wants to protect American
manufacturers from competitive imports, but also to skew the entire global
trading system in favour of America’s interests.
New
Zealand was a leader in the global free trade movement of the late 1980s and
early 1990s. As Trump tries to force the pendulum back the other way, we will
not be able to avoid being caught up in the consequences of a struggle that has
only just begun.