At last, we know enough about US President Donald Trump’s opening move on tariffs to start thinking about what it all means. By imposing tariffs on America’s imports, he’s shot his economy in the foot, but the rest of the world decides how bad it’s likely to be by what we do in response.
But first, don’t be too impressed by the big fall in share prices. The sharemarket isn’t the economy. You could regard its movements as a predictor of whether the economy will keep growing strongly or fall in a heap, but it’s an unreliable guide, having called a lot more recessions than have actually happened.
Compulsory superannuation has given every employee a stake in the sharemarket — including overseas sharemarkets — but although share prices go down as well as up, over the years they tend to rise. So only if you’re just a year or two away from retirement — and will be needing to sell shares for money to live on — should you care about the latest drop.
Back on tariffs, everyone benefits from being able to trade with other people, whether they live inside or outside our country. The lower the barriers to trade, the better off we and our trading partners become.
So, while Trump’s tariffs — import duties — will hurt the countries it imports from to an extent, it’s the American businesses and consumers now having to pay more for their foreign purchases that will be hit hardest.
What he’s done will increase US prices and discourage growth in his economy — an unusual combination — increasing the risk of a US recession.
But, as most people realise, the direct effect on Australia from Trump’s act of self-harm won’t be great. That’s because the Yanks take a surprisingly small share of our exports, and the new tariff on us is just 10%. Thankfully, neither Anthony Albanese nor Peter Dutton is foolish enough to add to the harm by slapping tariffs on the modest amount of stuff we import from the US.
So, what matters most to us is the indirect effects on us from Trump’s attempts to start a trade war with the other big economies. If they decide to damage themselves by hitting the US back tit-for-tat, then it really would be a global economic disaster.
Fortunately, the early signs are that most countries have been too smart to yield to that temptation. They’ve said that while they’re ready to take “countermeasures”, they’ll start by opening negotiations to secure a deal.
Trump is so crazy there’s always a chance that’s all he’s after. “You give me something, and I’ll put the big stick away.” If so, the trade war doesn’t really get going. But it’s risky to give in to bullies, which only makes them want to come back for another bite.
If Trump demands too much in return for dropping his new tariff, America’s former friends and allies will be obliged to press on with the countermeasures they’ve prepared. Since a tit-for-tat approach would be self-harming, we can hope that these will have been carefully designed to hit the US harder than they damage their own economies. That would minimise the fallout from the trade war.
On the face of it, however, the main country Trump is trying to punish, China, has not resisted the temptation to give as good as it’s got. Trump’s new tariff on China is 34% which, added to its existing duties, gives it a total impost of 65%. China will hit all its imports from the US with a 34% tariff.
“Face” could well be part of the problem here. China, now the world’s biggest economy (when you allow for “purchasing-power parity” because US$1 buys a lot more in China than it does in the US), can’t fail to hit back when whacked by the second-biggest economy.
The trick is that America buys a lot from China, and China buys a lot from America. It’s when the two big boys really start slugging it out that the risk of recession in the US becomes a risk of a global recession. And, since China is our biggest export market, that’s where the most indirect damage could hit us.
There’s always a possibility that when enough Americans realise that, contrary to what it says on his baseball cap, Trump is Making America Poor Again, he’ll be forced to wind the whole madness back down.
If we do really have a trade war that lasts longer than a year or so, then there are two things to remember. First, if the other big economies, such as the European Union, Japan and Britain, don’t join in the madness, then most of the damage is confined to the US and China as they slug it out. We’d still be hit by a significant indirect loss of export income, but it could have been worse.
Second, the longer the two biggest economies continued their boxing match, the more the rest of the world would start diverting their trade away from the US. And since the US is attacking all the other countries — including very high tariffs on some South-East Asian economies — but China is attacking only the US, much of the diversion is likely to head in China’s general direction.
Remember, the US was the primary driver for a Trans-Pacific Partnership, aiming to set trade rules in the Pacific Rim and counter China’s growing economic influence. When, in his first incarnation, Trump pulled out of the proposal, the rest of us — including Japan, Canada, Australia, Chile, Peru, Mexico and several South-East Asian nations — pressed on, simply renaming it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
And note, just before Trump’s “Ruination Day” announcement, the leaders of China, Japan and South Korea met and agreed to strengthen trade ties in response to whatever Trump announced.
If Trump’s tariff madness isn’t likely to kill off the world economy, it will certainly cause major changes to who’s trading with whom. And we’ll be doing a lot more trade with the countries in our region.
Republished from The Sydney Morning Herald, 7 April 2025
Ross Gittins is the Economics Editor of The Sydney Morning Herald.