How will Trump’s tariffs affect Australia?

With the newly elected Trump administration threatening to introduce higher tariffs on imports, the Australian government should act quickly to seek tariff exemptions, and businesses should prepare to adapt to a more challenging trade position, says Richard Holden, Professor of Economics at UNSW Business School. 

“It Trump goes ahead with across-the-board tariffs or very significant tariffs on China, that could easily usher in retaliatory tariffs and an era of deglobalisation – and that would be very bad for the US economy, for the global economy, and for Australia in particular,” he said. 

If the Trump administration goes ahead with introducing tariffs, other countries such as China and Europe could impose across-the-board tariffs, which would also negatively impact Australian exports. 

“China might do the same thing and say, ‘Well, if the US is going to impose big tariffs on Australia, which is a military and security ally of the US, then we’ll have big tariffs on Australia.’ That would be really bad for all of our exports,” said Prof. Holden.  

There is also the potential for a “big hit” on the Chinese economy in general, and this would have a domino effect on the Australian economy: “If that’s the case, then they won’t need as much steel, which means they won’t need as much iron ore,” he said. 

“And that means they won’t need as much energy, which means they won’t need as much Australian coal. So, there could be a very significant hit on our exports across the board.” 

This point was echoed by Petr Sedlacek, a Professor of Economics at UNSW Business School. Even if tariffs are not imposed directly on Australian goods, he said they may still have an indirect negative impact.  

“This is because the planned import tariffs have China in particular in their sights. If actioned, Chinese exports and overall economic performance are likely to drop,” he said. 

“Given that China is a major export market for Australian firms, such an event would have negative consequences for the Australian economy.”  

An Australia Exemption?

The best thing Australia can do at the outset is to lobby the new US government for an exemption, said Prof. Holden. 

“Joe Hockey (formerly Australia’s Ambassador to the US) and Kevin Rudd (current Ambassador to the US) actually make a pretty good team in trying to get an exemption for Australia on US tariffs,” he said.  

“Hockey is a kind of a golf buddy of Trump’s and Rudd is obviously the Ambassador – and a noted China Hawk, so in some ways, we’re quite well positioned to get some kind of exemption from the US. 

“However, this kind of abandonment of the rules-based international order doesn’t suit Australia. I’m not sure anyone’s particularly well suited to dealing with that because it goes against the type of approach that both sides of politics in Australia have taken over a very long period of time.  

“So, Australia is not all that well suited to dealing with that, and it will be a real challenge,” he said. 

And in the bigger scale of world trade, Australia does not have much leverage with the US, Prof. Holden said. “It’s a time where Australia is not going to have an important seat at the table,” he said. 

“This is not a job for the Australia’s foreign minister. This is going to be a set of negotiations between Trump and the likes of Xi and Putin. As to how that shakes out, I think Australia will be a bystander and an observer, unfortunately for businesses here.” 

How can markets and businesses adapt? 

In the face of tariffs from the US as well as potentially from important trading partners, Prof. Holden said “we want to make our economy as robust and resilient as we can,” he said. “That’s about all we can really do.” 

While there may be much uncertainty for businesses facing higher tariffs, Prof. Holden encouraged innovation and said there will be a “big payoff” for businesses that can adapt quickly in the face of challenging economic circumstances. 

Prof. Sedlacek agreed that any period of restricted international trade as a result of new US trade policies is likely to send negative shockwaves through the global economy.  

“The short-term impact may be particularly painful. But competitive pressures and substitution are powerful forces, and it is likely that in the medium-term, businesses will find new trading partners and alternative markets,” he said. 

There have examples of other countries around the world that have had to make economic adjustments to large shocks, according to Prof. Sedlacek, who pointed to the response of the European economy after it was cut off from Russian gas. 

Economic lessons

“Are you better off now than you were four years ago?” Prof. Sedlacek said this was a favourite question that Donald Trump often asked his supporters in the run-up to the election.  

“The perceived state of the economy has always played an important role in US presidential elections, and this year was no different,” said Prof. Sedlacek. 

In fact, he said Trump has always cultivated an image of being savvy when it comes to questions of the economy. Back in 2018 when he was still president, he made similarly bold claims, when he said: “We’ve got the greatest economy, maybe, ever – maybe in history. We have the greatest economy we’ve ever had… If we didn’t win, this economy would be a wreck.” 

While Trump had been fast to take credit for a genuinely strong U.S. economy in 2018, Prof. Sedlacek said economic research suggests there would have been no difference between the post-election performance under Trump in 2018, and a “doppelganger” US economy without Trump. 

“In short, there was no evidence of an economic ‘Trump effect’,” said Prof. Sedlacek, who explained that the researchers let an algorithm determine which combinations of other OECD economies best matched the evolution of the US economy prior to the 2016 election – the so-called “doppelganger”. 

“It is then possible to compare the evolution of the US economy since the election with that of the doppelganger, as if Trump had not been elected. 

“This approach has been successfully applied to similar events, such as the German unification and Brexit, but even completely unrelated questions, such as the introduction of tobacco laws in the US,” he said. 

“The result of this analysis shows no evidence of a Trump effect. By mid-2018, the growth rate of real GDP – arguably one of the main economic indicators – was indistinguishable between the doppelganger and the actual US economy.  

“A similar conclusion can be made about employment, another key economic metric and prominent political goal. It remains to be seen whether this time around will be different,” Prof. Sedlacek concluded.