Trade tariffs are the new normal – and that’s unlikely to be positive for Australia
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‘Australia’s economic history tells us that our economy generally prospers in an environment of free trade, reflecting our status as a small, open trading economy.’ Photograph: James Gourley/AAP

Sally Auld was previously chief investment officer for NAB Private Wealth and JBWere and is the incoming chief economist for NAB

US tariff policy has dominated headlines in recent weeks. In many respects, this shouldn’t come as a surprise – President Trump has been clear in his belief in tariffs as an effective policy tool. Indeed, the new US administration views tariffs as not only a means of raising tax revenue but also as a negotiating tool and a lever to ameliorate so-called trade imbalances. So far, we have seen both the threat of tariffs and the use of tariffs to achieve all these objectives.

Despite all the headlines, Australia hasn’t really been subject to large changes in tariffs on its exports to the US. The US has, however, announced a 25% tariff on all steel and aluminium imports. If Australia is not successful in obtaining an exemption, Australian steel and aluminium exports to the US will be subject to new tariffs from 12 March. At an aggregate level, this won’t make much difference to Australia’s trade balance because the value of our exports of steel and aluminium to the US is only a very small proportion of our total exports. This is not to ignore the fact that, at a firm or industry level, a 25% tariff is significant.

Beyond the tariff on steel and aluminium, Australia is unlikely to suffer a large direct impact from changes in US tariff policy. For a start, Australia runs a trade deficit with the US; that is, the value of our exports to the US is lower than the value of our imports from the US. In contrast to some countries who run large trade surpluses with the US, such as Canada, Mexico, Vietnam and China, this means that we are unlikely to be in the firing line for large tariffs. And  by the Reserve Bank of Australia shows that even if the US levied an additional 10% tariff on all Australian exports to the US, the direct impact would be about 0.1% of GDP; that is, very minimal.

But we know that the world is more complex than a simple bilateral trade relationship. And so it is right to consider the fact that Australia is very integrated into the global economy when we are trying to assess the impact of changes to US tariff policy. Australia’s economic history tells us that our economy generally prospers in an environment of free trade, reflecting our status as a small, open trading economy. So a more difficult environment for global trade is unlikely to be positive for Australia, all else being equal.

At an economy-wide level, a global trade war based on higher tariff rates will be detrimental to Australian economic growth. Working out by how much is difficult, and requires a large number of assumptions across a range of variables. The impact on inflation is unclear and could be either positive or negative.

One framework that might help us to think about changes to US trade policy is that of regime change. The world that many of us grew up in – the three decades from the 1980s – was generally characterised by a belief in free markets and free trade. Capital and labour moved with ease across borders, China entered the World Trade Organization and companies chose to locate manufacturing capability in cheaper locations offshore.



The world has looked quite different in the last few years. Tariffs and export controls are now part of economic statecraft and are working to impede free trade. Countries are turning inward in the interests of national and economic security. Labour is no longer so free to move across borders as some countries shift their attitudes towards immigration. In addition, the so-called peace dividend – where countries could spend more on social programs because they were spending less on defence – is clearly no longer. National interest and economic security now subordinate conventional foreign policy and diplomacy.

So when viewed in the context of a multi-decade regime change, the use of tariffs should be thought of as part of the new normal. This is a very different environment to that which has defined most of our lived experience, and so it is not surprising that businesses and consumers are feeling unsettled. And herein lies the main risk – if consumers and businesses feel like the outlook is too uncertain, then they may elect to postpone spending, hiring or investment spend. One consumer or business acting in this way won’t matter too much, but if everyone does it, then the aggregate impact will be sizeable.

Regardless, we should take comfort in the fact that Australia has a floating exchange rate and ample scope to ease both fiscal and monetary policy. All these factors will help to support the economy in the wake of weaker domestic and global economic growth in the event US tariff policy proves disruptive.

Sally Auld was previously chief investment officer for NAB Private Wealth and JBWere and is the incoming chief economist for NAB
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