The 25% tariff on Australian exports of steel and aluminium to the United States commenced as of 3pm this afternoon. Australia is not alone in facing this tariff hike, and while under Trump’s first presidency Australia got an exemption, no such luck this time. The cost to Australian producers is modest as our exports of steel and aluminium come in well under $1 billion, and it is US consumers who will pay much of the tariff.
While not facing tariffs would be clearly a better outcome, our exemption last time did not deliver a windfall to Australian producers in higher sales. What it did do was give other countries ammunition to lobby Trump for similar exemptions. This made it far less likely this time around that Trump would provide Australia an exemption, regardless of how nicely we asked.
And if pointing out Australia’s trade deficit with the United States, the $3 billion to be paid to US shipyards, and its security agreements does not work, what will?
The Trump administration seems caught between tariffs as a great revenue source and tariffs as the ultimate onshoring of manufacturing strategy. Both cannot be right – and most likely neither will work out as planned because markets adjust. The best strategy for countries that trade with the United States is to facilitate this market adjustment.
Like the US tariffs, reciprocal tariffs are expensive to the country that imposes them. It simply pushes up the cost of imports. Higher prices of imports feed through into higher prices of the goods and services that use these imports in their production. Domestic producers of substitutes for these imports can charge higher prices and still be competitive, so their prices go up, too. This is a price shock – a jump in prices rather than a rise in inflation – but countries facing cost of living concerns (as most are) should be reluctant to get into this tariff tit-for-tat game. Australia’s bipartisan strategy of not imposing retaliatory tariffs on our imports from the United States is driven by this cost concern.
Where retaliation might make some sense is where there are domestic producers that can expand production to replace the US imports. Countries have long entertained tariffs as part of an industry policy to promote local production. Unfortunately, unless the protected industries grow to become internationally competitive, such as Japan and South Korea have successfully done in electronics and automobiles, this strategy ends up costing the country’s consumers who have to pay more for often inferior products. So, retaliation makes sense only if it hurts US firms that can put pressure on the Trump administration to remove the US tariffs. On this front, Australia is too small a market to matter much to US firms – another reason to avoid this strategy no matter how good it might feel to make a show of force.
There is a real danger that individual country responses to the US tariffs will trigger a wave of anti-dumping retaliatory tariffs.
We should leave tariff retaliation to those countries whose market size and integration can impose real costs on US firms. What we, and other countries whose trade is being disrupted, can and should do is to look for ways to facilitate market adjustment to a more isolationist America.
Many countries, Australia included, will seek to divert their previously US-bound products to other markets. Countries should look for long-term mutually beneficial trade rather than seeking to off-load excess supply in third countries. There is a real danger that individual country responses to the US tariffs will trigger a wave of anti-dumping retaliatory tariffs – spreading the US tariffs across the globe and heading the global economy deeper into the protectionist mire of falling productivity.
Australia should reach out to other countries to work together with the World Trade Organisation to manage the global trade transition to a more isolationist United States. Developing pathways for speedy resolution of anti-dumping claims would be a good start, although cooperation to restrain the use of these “beggar thy neighbour” trade strategies by being good global citizens would be even better. This kind of cooperation would provide a platform to look for other ways than through trade to retaliate against a United States seeking to impose a “might is right” approach to the global trading, investment and financial system. US firms will take note if they think that they will no longer be able to negotiate special deals on taxes, access to resources, or extensions on Intellectual property rights such as through evergreening of patents.
Agreement on a global cooperative strategy to drive global growth without the United States is probably the best way to retaliate against the US tariffs. Because the whole point of retaliation should be to get the Trump administration to back down on its tariff agenda, not to vent anger. We need US firms to recognise just how well they have done out of global trade and why they should be working to return the United States back to its past role as a promoter of free and open global trade.