Australia can't just let Trump do what he wants

By MILLIE MUROI, Economics Writer

Donald Trump doesn’t like taking no for an answer. So really it comes as no surprise that, within minutes of three American judges blocking his tariffs from taking effect this week, he hit back with an appeal and questioned their authority.

It’s reassuring that the Court of International Trade took a stand. The judges stopped short of passing judgment on the effectiveness or wisdom of tariffs, but ruled the president couldn’t just use emergency powers in an (apparent) bid to protect the US economy. That power, it reminded Trump, actually rests with the Congress. The situation remains fluid, though; overnight a federal appeals court agreed to temporarily preserve the tariffs while the appeal is urgently held.

Nonetheless it’s probably a bit awkward for Trump, given his No.1 rival – Chinese President Xi Jinping – won’t have the same constraints on his power. Whether Xi pushes forward with tariffs on the US is unclear (he also has a lot to lose from imposing tariffs) but he may want to seize the opportunity to rub the mud in Trump’s face at a time when the US president can’t fight back.

But whether or not the court’s finding withstands the appeal, Trump has (and will continue to) hurt businesses and customers worldwide – including here in Australia. Why? Because some of the damage has already been done.

In a speech at an Australian Business Economists’ event in Sydney this week, Treasury Secretary Dr Steven Kennedy assessed some of the rubble.

First, he says markets have experienced unusually high levels of volatility. Investors have faced whiplash as Trump followed up his extensive list of tariffs on countries (including tiny islands – some inhabited only by penguins) with a 90-day pause on tariffs, before escalating his trade war with China.

While market movements may not matter hugely on their own, they’re a sign of how rattled people are, and how uncertain the future is. Uncertainty deters business owners from investing and customers from buying because most people are not adrenaline junkies who want to sink money into things during periods of turbulence.

That slows down economic growth – and it can take ages for people to feel like it’s safe enough to spend.

But there’s also a chance Trump’s tariffs will be waved through on appeal, further worsening worldwide economic growth. As Kennedy points out, the International Monetary Fund (IMF) recently slashed its forecast for global economic growth from 3.3 per cent to 2.8 per cent this year.

While its forecasts for the Chinese and US economies both took an especially large hit (the tariff escalation is most intense between these two, after all), it’s actually China, not the US, that will have a bigger knock-on effect on other countries if the trade war continues.

“Outside of the years affected by COVID-19, China has contributed more to world growth than the G7 since 2006, and more than the US since 2001,” Kennedy says.

Australia, which does a third of its trade with China, would, of course, be especially vulnerable. Less growth in China, and thus less demand for Australia’s exports (things such as iron ore, beef and coal) from our biggest trading partner, would weaken domestic growth. That’s on top of the dampening effect of uncertainty on Australian household spending and business investment spending.

A weaker Australian economy would mean less hiring by businesses, fewer Australians holding down jobs, and slower wage growth.

One glimmer of hope is that price increases would probably slow a little. Wouldn’t tariffs wreak havoc on supply chains and push up inflation? Well, probably. But Kennedy says that’s likely to be offset by more low-cost output from China making its way to us as its trade is redirected from the US.

Since Australia trades very little with the US, Trump’s tariffs on Australia – if they resumed – wouldn’t be a huge worry. “The indirect impact [of tariffs] is nearly four times as large as the direct effect,” Kennedy says.

So, what can we do? Well, Australia’s decision not to hit back with our own tariffs is a good start. There’s very little point in stoking Trump’s ire when we have little to gain (and plenty to lose) from imposing tariffs. The main effect would be to make American imports costlier for Australians, which would just end up hurting our hip pocket.

Another thing we can do is make the most of the chaos by positioning ourselves as a safe, stable and attractive place to invest in as people pull their money out of the US. A “pick me” strategy? Perhaps, but it’s a good idea.

The Trump administration has made it clear that it wants to reshape the economic order and kick China down a few rungs. US imports from China have fallen steadily from their peak of about one-fifth of total imports in 2017 during Trump’s first term to just over one-tenth in 2024.

But Trump has also made it obvious he doesn’t care who he hurts in doing so.

Kennedy says Australians will have to adjust to this reality through policy changes.

While the US seems to be raising its walls (after failing to build a physical one on its southern border some years ago) and trying to become more self-reliant, Kennedy says following the same strategy is a mistake for smaller countries including Australia that benefit greatly from trade.

“It is not in our self-interest to respond by also raising barriers,” he says. Instead, we should be going the opposite way: removing barriers to trade, and turning to a wider array of trade partners.

Kennedy points to the Australian government’s renewed negotiations with the European Union on a free trade agreement, and efforts to expand existing compacts such as the Progressive Agreement for Trans-Pacific Partnership – both of which make it easier to trade.

Striking new trade agreements and looking to our neighbours, too, in countries such as Indonesia and India will be hugely beneficial, especially as these countries continue to grow and themselves look for reliable trade partners outside the US.

As Kennedy says, we’re facing more than the usual degree of uncertainty, but it may be time to stop saying that and accept that, for the foreseeable future, the world will be characterised by it. While Australia is caught in the crosshairs of a fight it didn’t start – or want to participate in – we don’t have to let Trump’s unpredictability take our economy off track.

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Trump is making a huge blunder. Here's how we seize the moment

By MILLIE MUROI, Economics Writer 

Eventually, Donald Trump will backpedal. Economists get plenty wrong, but one thing most believe – and get right – is that widespread tariffs are stupid. Why? Because they create more losers than winners.

Trump is smart enough to know this. But he’ll look to twist arms with his tariffs until some of his demands are met (seemingly at the top of his wishlist: Mexico, Canada and China curbing illegal border crossings and drug cartels). He’s betting on this happening before Americans start to notice their living standards drifting into the gutter.

For Australia, now’s the time to swing. Not at Trump, but towards the neighbours we’ve neglected. To its credit, the federal government isn’t playing into the president’s games: as Treasurer Jim Chalmers said this week, the tariffs on Australian steel and aluminium are disappointing, but our response will not be to raise tariffs on the US in a race to the bottom.

Why? Because taxing imports backfires. Tariffs make imports more costly for consumers as well as businesses relying on imported fuel, ingredients or goods to make or sell their products. Sure, tariffs on steel might shield steel producers in the US, but it will stop those workers and resources from flowing to more efficient areas – and at the expense of Americans needing steel to build (and buy) machinery, houses and cars.

Remember – the reason we trade is to specialise in things we’re better at doing or producing than others. For Australia, these are mostly resources we dig up and ship off. Iron ore accounted for more than one-fifth of our exports by value in 2023-24, followed by coal and natural gas, both at about one-tenth each. We can then use the money we make to buy the things we’re less good at making.

That includes cars. We produced them for decades in the 1900s, but eventually the Australian car manufacturing industry stalled and shut up shop in 2017. It was just too costly to continue pumping out cars, especially when we could ship them in and focus on the stuff we could produce better than everyone else. In 2023, cars made up 6 per cent of our imports, just behind the one-tenth spent on globetrotting and similar share spent on petrol.

Luckily for Australia, a drop in exports to the US isn’t going to hobble us. Only about 6 per cent worth of our exports were destined for the US in 2023 – far less than the one-third shipped up to China and 12 per cent sent to Japan. China’s appetite for Australian exports is mostly for commodities such as iron ore, natural gas and gold.

However, slapping tariffs on US imports to Australia would take a toll on us. While one-quarter of the value of our imports comes from China, about one-tenth flows from the US and another tenth from Japan. Responding to the US with tariffs of our own would make machinery, planes and pharmaceuticals, among other things, more expensive.

One thing that has kept Australia in Trump’s good books, at least until recently, has been the fact we have a trade deficit with the US. That is, we import more from the US than we export to them. The US, in turn, has a trade surplus with us: they export more to Australia than they import to us. But does this really matter?

Well, not really. For example, Australia had a more than $110 billion trade surplus with China and $30 billion trade deficit with the US in 2023. Neither of these things is necessarily “good” or “bad” because both importers and exporters benefit from trade.

But a big trade deficit or surplus can suggest if a country is especially reliant on another country for supplies or income – and therefore more at risk to shocks such as tariffs.

Trump’s tariffs – and threat of more to come – are a chance for Australia to branch out from its biggest trading partner.

It’s not the first time we’ve done it. In the 19th century, Australia was heavily reliant on the UK as a destination for our agricultural and mineral exports. As the UK shifted towards a more protectionist economy with high tariffs in the early 1900s, and stopped giving Australia preferential tariff treatment, we shifted towards some of the countries which are, today, among our biggest trade partners, including the US and those in northern Asia.

Whether Trump stubbornly keeps his foot on the tariff pedal or not, Australia has a good opportunity to build stronger ties with countries in South-East Asia which have expanding economies, growing middle-class populations and are geographically closer.

Many of these countries, including Vietnam, Taiwan and Thailand – which are among those most likely to be hurt by Trump’s tariffs because of the large amount they export to the US – will probably also be more open to strengthening ties with neighbours in the Asia-Pacific. It also makes sense to build stronger ties with our neighbours from a strategic geopolitical perspective as China poses a growing security threat to the region.

The government is already looking for ways to expand free-trade agreements in South-East Asia and reviewing ways we can work more closely with the region. But taking action now is crucial.

A recent visit to Vietnam opened my eyes to egg and coconut coffees (I now make one most days after decades of believing I didn’t like coffee), but the country is also a growing player in pharmaceuticals, making prescription medicines and turning into a manufacturing hub as it transitions away from a primarily agricultural economy.

Vietnam will not, for the foreseeable future, be a replacement for the US: a clear world leader in pharmaceuticals and far advanced in manufacturing. But investing in the capabilities of countries in South-East Asia, partnering with them and fostering connections with its people – including drawing on ties and expertise held by immigrants from the region who can provide insight – is important.

Like past shifts, pivoting away from old friends won’t be a quick process. It will take time, investment and some pain to focus on strengthening trade and ties with new countries, many of which are facing their own challenges and growing pains.

We’ve got the right idea when it comes to exercising restraint on tariffs of our own. But whether Trump backs down soon or not, Australia needs to play a longer game when it comes to trade.

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