In just a couple of weeks, a century’s worth of US trade liberalisation has been entirely overturned. Now whilst Liberation Day’s tariffs have since been scaled back by Trump, replaced by a temporary 10% baseline rate on all trading partners, the brewing trade war between the globe’s two largest economies shows no sign of de-escalation, with Trump’s 145% tariff on Chinese imports beckoning a protracted trade war.
Seeing that China comprises a third of global production, and the US a quarter of global demand, the fallout will see a decoupling of seismic magnitudes, with no country going unscathed. Australia has been hit with a 10% tariff on its $22bn of annual exports to the US, but this only scratches the surface of the potential ramifications of such tariffs. Further, despite Trump’s recent scale back of tariffs on technology companies, it seems likely that tariffs are more than just a short-term “negotiating tool” as seen by some – Trump’s tax-cutting agenda creates a gaping budget deficit of 6.4% GDP which needs cash to plug.
Who better else to pay for it than other countries?
So, in such global uncertainty where does Australia stand in all of this, and can we manoeuvre our way out of a potential recession?
Firstly, Australia is better placed than many other countries to withstand the tariffs, given our small direct trade exposure with the US. That being said, Australia will not be spared completely, with a weakened China set to also negatively impact Australian exports (almost 40% of our exports go to China). Fortunately, however, just over 80% of China’s steel production gets consumed internally – with only a small amount arriving in some form or another to the US. This should somewhat mitigate downwards pressure/demand for our iron ore exports.
However, such uncertainty has also weakened consumer and business confidence, which translates to lower spending and investment. Much hope now lies in domestic Chinese infrastructure stimulus which would prop up its demand for our commodity exports. Without fiscal stimulus however, China’s economic growth is expected by Barclays to fall to 2% compared to its 5% target.
In the meantime, the RBA is closely following the developments abroad but is taking a wait-and-see approach for the release of economic data over acting pre-emptively. Bullock, in her remarks, projected confidence in the resilience of Australia’s financial systems, signalling no need to rush to drastically cut interest rates. Moreover, there is some cautious confidence that China will unveil strong infrastructure and monetary stimulus to offset the trade disruptions. If indeed that does eventuate, the tariff impact on Australia is largely seen to be subdued, and recession less likely. Hence, whilst there is plenty of speculation as to the future, with bond markets pricing in 5 rate cuts by December taking the cash rate to 2.85%, as well as a 33% chance of a 0.5% rate cut in May, it is evident the RBA is still very far from a decision, keenly awaiting the prognosis in the aftermath of Trump’s “surgery”.
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