Businesses are warned agility is the key to staying afloat as President Trump continues to threaten, impose and tweak tariffs
Exporters bracing for ongoing tariff turbulence face a choice: double down on existing relationships or spread their risk through diversification – which one trade expert says has developed a negative connotation.
Speaking at the annual Auckland Trade and Economic Policy School event, hosted by the Public Policy Institute at the University of Auckland, Fonterra’s trade strategy manager Justine Arroll spoke of the importance of optionality. The company is not exiting the US because of access or trade challenges, but rather maintaining an “ability to pivot” and adjust its product mix as disruptions occur.
“Typically, we’ve invested a lot in building up customer relationships and developing products that suit specific niches in a market, and it’s very difficult to then walk away from those market-specific premiums and to divert the product into other regions,” she says.
“With the increase in these types of disruptions, that is going to become something that New Zealand businesses are going to have to become more adept at.”
The panel discussion comes in a week of more tariff turbulence. Late on Sunday New Zealand welcomed the United States’ announcement it was removing additional tariffs on $1.25 billion in agricultural exports, including beef, offal and kiwifruit.
Trade Minister Todd McClay said he would continue to make the case that additional reciprocal tariffs on other exports – introduced in April at 10 percent and increased to 15 percent in August – should also be removed.
Felicity Roxburgh, of the NZ International Business Forum, said optionality is “the new buzzword”.
“We’re not diversifying anymore people, because diversification has, kind of, a negative connotation to it. Optionality is fluid, it’s dynamic, it’s agile. That’s where we want to be.”
Fonterra’s trade strategy manager Justine Arroll, Felicity Roxburgh of the NZ International Business Forum, KPMG’s Nick Swallow and Dr Antje Fiedler from Waipapa Taumata Rau at ATEPS. Photo: PPI
However, flexibility with products, markets and supply routes isn’t one-size-fits-all. Nick Swallow, director in KPMG’s private enterprise team, says optionality “comes with an opportunity cost” and isn’t always viable for smaller businesses.
Swallow said the businesses he works with range in US exposure from around 20 percent to 85 percent. At that upper end, even a partial pivot could lead to the business’ demise.
“This is a significant market for a lot of New Zealand businesses … they are not wanting that to disappear, they’re thinking a little bit more long term. In some businesses we’re talking about net profit going down to almost zero … because they’re eating the tariff to a degree.
“It’s a holding position. So reduce costs. In other areas, I’ll limit the amount of stock, but long term I still see that the US is going to be critical, and I don’t want to lose that.”
What the stream of tariff announcements has made apparent to these businesses is the need to develop a “deep understanding” of trade issues and the minutiae of processes, such as rules of origin and implications of different stock-keeping unit numbers, he said.
“In response, what we’re seeing is a lot of New Zealand businesses reducing their complexity in the market, so reducing the number of stock-keeping units, focusing on areas where they might have a higher value or higher margin.”
Others are reducing their tariff by lowering the value of their product at the border (a paperwork-heavy process) or looking at shifting a portion of manufacturing to the US.
In a post on LinkedIn, founder of menswear brand I Love Ugly, Valentin Ozich, outlined changes he’d made in light of the tariffs imposed by the US, which was the company’s biggest market “by a long shot”.
“As a result, we’ve doubled down on Australia and seen some incredible results. We are scoping multiple retail opportunities over there, as well as a few other strategically placed stores within NZ. Our Kentucky warehouse launches in January, which sets us up to scale big again in the US.”
Pitfalls and opportunities resulting from tariffs are distinct across industries and businesses, depending on size, relationships and current market exposure.
Fonterra operates across 100 markets; China is the largest accounting for around 30 percent of its portfolio, the US second, followed by a long tail of markets that are relatively lower in value.
“We’re focused on maximising the revenues and the highest returning markets to ensure that we’re providing the highest returns back to our farmer shareholders.
“While trade and geopolitical uncertainty is certainly a consideration when we’re thinking about that footprint across different markets, diverting product proactively to lower-returning markets doesn’t necessarily provide you with a robust insurance policy, and obviously has a negative impact in terms of revenue.”
Prof Peter Draper from the University of Adelaide, Dr Deborah Elms of the Hinrich Foundation and Stephanie Honey (Honey Consulting). Photo:PPI
In an earlier panel discussion, Deborah Elms, head of trade policy at the Singapore-based Hinrich Foundation, warned that Asian countries that may look attractive for NZ exporters are already absorbing US-diverted trade and aren’t a frictionless fallback.
“Domestic firms are going to be pushed to the wall because they’re not competitive anymore. What are they going to do? They’re going to scream bloody murder to the Government to say: ‘Do something about this’.”
Despite this growing threat of protectionism, Elms said relationship-building can be a means of future-proofing and should still be prioritised.
Absent at the University of Auckland event was Trade and Investment Minister Todd McClay, who is in India engaging in a fourth round of trade deal negotiations. Local news outlets have quoted officials as saying talks were “nearing closure”.
Originally published in Newsroom. Republished with permission.
