President Donald Trump has massively increased US tariffs and upended the world trading system. As of 5 April, the United States will impose an across-the-board baseline tariff of 10%, and from 9 April higher “reciprocal” tariffs will be applied on imports from more than 50 trading partners. Australia is in the relatively fortunate group of countries facing only the baseline 10% tariff.
The tariffs have multiple objectives, including reducing barriers on US exports – real and perceived – attracting foreign investment in US manufacturing, and raising revenue. The size of the US trade deficit was the basis for invoking the national “economic emergency” powers giving the president powers to regulate trade.
Product exclusions include goods subject to Section 232 tariffs (steel and aluminium, autos and auto parts) or under separate trade investigations (copper, pharmaceuticals, semiconductors, and timber); and gold bullion, energy and minerals not available in the United States. Canada and Mexico remain on a separate tariff track.
To the extent that some of Australia’s competitors are being hit with higher tariffs, our exporters will be at a relative cost advantage.
The economies with the highest US bilateral trade deficits face the highest reciprocal tariffs: China 34%, the European Union 20%, Vietnam 46%, Taiwan 32%, Japan 24%, South Korea 25%, Thailand 36%, India 26%, Malaysia 24%. These retaliatory tariffs, which are well above the average tariff rates of those trading partners, are intended to be the basis for negotiations to bring down barriers to US exports.
US trade barriers, such as its high sugar industry protection, will not be on the table in reciprocal tariff negotiations.
In a small silver lining for Australia our exporters won’t face significant discrimination in the US market because our non-US competitors are affected by tariffs at least as high as our 10%. To the extent that some of our competitors are being hit with higher tariffs, our exporters will be at a relative cost advantage (e.g. Australian vs EU wine).
Major Asian economies tried but failed to avert reciprocal tariffs by announcing big investments in US manufacturing. Japan’s Prime Minister Shigeru Ishiba told Trump that Japan would increase its fixed investment in the United States by more than $200 billion. Taiwan’s TSMC announced a $US100 billion investment in three new semiconductor manufacturing plants. And Hyundai announced new investments in automobile and steel manufacturing.
These investments – which Trump touted during his tariff announcement – could still play a role in winding back reciprocal tariffs. But Trump also wants reductions in barriers to US exports.
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Donald Trump outside the White House holding a prop listing tariffs against other countries (White House Photo/Flickr)
US President Donald Trump shows off his list of tariffs against other countries (White House Photo/Flickr)
Likely efforts by some US trading partners to “buy” tariff relief heightens the risk of purchasing deals, potentially at the expense of Australian exports to those markets. The United States accounts for 29% of Vietnam’s exports, about 20% for Japan, Korea and Thailand, 12% for China and Malaysia, and 11% for Indonesia.
Some of our biggest primary commodity exports to these markets (minerals, beef and grains) are particularly vulnerable to informal guidance to buy US products.
The world’s most powerful and advanced economy is adopting an import taxing/import-substitution policy more commonly associated with countries at the earliest stages of industrialisation.
A crucial detail to monitor is whether Washington demands that countries open their markets only to US exporters or whether trade barriers are reduced on a most-favoured nation (MFN) basis. Should the US insist that tariff reductions by partners apply only to US goods it would represent a major blow to the central principle underpinning the World Trade Organisation. It would also represent a departure from nearly a century of US policy.
More of China’s exports to the United States will be priced out of the market. The 34% reciprocal tariff will be applied on top of existing high tariffs. Chinese exporters had been banking on operations in Vietnam and Mexico to skirt US tariffs but that’s no longer possible at scale. So substantial volumes of Chinese goods will be directed other markets in the next few months.
Australia’s trade remedy laws are inadequate for a world of substantially displaced trade. Should third country exports be directed to Australia in large volumes, the hurdle to prove “serious injury” damage from imports is so high that industry would not be able to rely on safeguards tariffs to provide a remedy. Anti-dumping duties could provide short-term relief for sectors familiar with the requirements of that system (e.g. steel, chemicals), but displaced trade won’t necessarily be dumped.
The new US tariffs are so high and wide-ranging that they represent an economic experiment. The world’s most powerful and advanced economy is adopting an import taxing/import-substitution policy more commonly associated with countries at the earliest stages of industrialisation. Higher US prices, massive displacement of trade and the upheaval of global supply chains are the likely consequences.
Trump’s tariffs will cause severe economic damage, particularly to trade-oriented countries in our region – many of which are among Australia’s main export markets. Tariff retaliation is tempting but ultimately self-defeating. The more countries that retaliate against the United States, the deeper the trade impacts are likely to be.
Australia should collaborate with our trading partners who attach similar value to an open, rules-based trading system. WTO members other than the United States must continue to observe WTO rules in their dealings with each other and maintain their commitment to tariff cuts on an MFN basis. Trump won’t embrace the WTO, but a future US administration might see the value in eliminating Trump’s tariffs and rejoining the multilateral system.