What is happening?
On April 2, the Trump administration held “Liberation Day”, when it introduced “reciprocal” tariffs aimed at countering what it sees as unfair trade practices inflicted on the United States by other countries.
The tariffs Trump announced on this day stunned governments and global markets in their severity. The US introduced a minimum 10 per cent tariff on all countries, but much higher tariffs on many important trading partners, including of course, China, whose exports will now be subject to 54 per cent tax, but also close US allies like Japan (24 per cent) and South Korea (25 per cent).
While Trump claimed the US was being lenient in not imposing full tariff reciprocity on other countries, it was soon revealed that the US government used a bizarre formula to calculate the scale of other countries’ tariffs on US exports. Remarkably, the Office of the US Trade Representative simply divided the US’s trade deficit with each countries’ exports to the US. They didn’t even include US services exports in calculating the deficit. Furthermore, the US even imposed tariffs on uninhabited islands, as well as on Diego Garcia Island, thus effectively taxing its own military base.
How do tariffs work?
A tariff is a tax on goods or services coming into a country. The cost is generally passed on to the consumer – meaning the imported goods or service become more expensive. Trump, however, repeatedly refers to tariffs, erroneously, as a tax on foreigners.
Why is Trump doing this?
It is difficult to understand the thinking behind Trump’s actions.
Tariffs can be useful to build up particular industries and shield them from imports, as part of a wider economic strategy in the service of economic or national security objectives. But such a strategy is hard to discern in Trump’s crude and sweeping measures.
Furthermore, Trump has justified the tariffs both as offsetting the revenue gap created by his tax cuts and as pushing companies to set up factories in the US. The two things operate at cross-purposes. If the latter succeeds, then tax revenue from tariffs will decline.
Furthermore, after decades of globalisation, most goods are often made via long and complex global value chains. Even if the final product can be made in the US, sometimes the intermediate goods or the capital goods – the components that go into the making of the final product and the machines used in the process – often come from other countries.
Therefore, US prices will likely rise, causing inflation, which is exactly the opposite of what Trump promised the American people.
What does it mean for Australia?
Australia has had a 10 per cent tariff imposed – which is the lowest level imposed by the Trump administration.
The US exports more goods to Australia than it imports from us. We are one of the few countries in the world that the United States runs a trade surplus with. We are not the kind of country that Trump would have issues with. Furthermore, the overall size of our bilateral trade with the US is relatively small, so it’s unlikely the 10 per cent tariffs will have a major impact on Australia’s economy directly.
On the other hand, some of the biggest tariffs were imposed on countries in East and Southeast Asia – notably China, Japan, South Korea, Malaysia, and Vietnam – that are very significant buyers of our commodities and services.
The tariffs could therefore have a very serious indirect impact on Australia’s economy.
And then there is the potential impact on the US dollar, which is going to rise because of these tariffs. Given the US dollar’s global role, this will have global implications. Should inflation rise again in the US, leading the Federal Reserve to increase interest rates, global borrowing costs will rise, slowing economic activity.
The bigger story, beyond these more immediate issues, is the impact of Trump’s tariffs on the world trade system and the global economy more generally. Economic globalisation, enabled by trade liberalisation, has completely reshaped how goods and services are produced and consumed globally. Trump seems to attempt to reverse processes that have played out over decades almost overnight. Whether Australia can still thrive in the new world order is unclear at this point.
But Trump’s actions raise issues for Australia that extend beyond their economic impact. The erratic behaviour of the US administration means we must also think carefully about the security implications of our relationship, especially as geopolitical rivalry between the US and China is intensifying into what some have called a new or second Cold War. Is AUKUS still the best means of securing Australia? For now, there are many more questions than answers.
is a political economist with the .
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