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Australia—US trade policy uncertainty an indirect headwind to exports
Global trade policy uncertainty is at its highest level since 1960 (Chart). On February 1, President Trump announced tariffs of 10-25% on imports from Canada, Mexico and China (which collectively accounted for US$1.3 trillion or 43% of US imports and 5% of GDP in 2023). While the implementation of tariffs on Canada and Mexico was postponed for 30 days, additional reciprocal and sectoral tariffs on US trading partners have since been announced. With respect to tariffs on Canada, Mexico and China, President Trump said the tariffs are a response to the fentanyl crisis and illegal immigration. More broadly, the Administration has said tariffs also aim to reduce the US trade deficit, protect US manufacturing, and raise revenue to finance future tax cuts. Some trading partners have responded by signalling both retaliatory measures and negotiation strategies.
The nature of our trade relationship, including that the US has a long-standing trade surplus with Australia, may shield Australian exporters from direct US trade penalties. However, several of President Trump’s announcements on tariffs, including on reciprocal tariffs and tariffs on steel and aluminium, have not yet come into force and specific details of their application are still subject to review by US officials. In any case, Australian exporters would be indirectly impacted by any tariffs imposed on other trading partners through the following.
1. Lower demand. US tariffs will weigh on growth in China and the US, which purchased 32% (A$213 billion) and 6% (A$38 billion) of Australia’s FY2024 exports respectively. More generally, unpredictable trade policies are likely to sap global investment and economic activity.
2. Weaker Australian dollar (AUD), to the extent that US tariffs exacerbate sticky US inflation and delay monetary easing. The average US tariff on imports is forecast to rise from 2.4% to 10.5% (levels not seen since the 1940s). Already, year-ahead inflation expectations among Americans jumped to 4.3% in January, from 3.3% a month earlier. Weaker commodity prices—that derive from a tariff-induced slowdown in China—and global uncertainty would also weigh on the AUD. While a lower currency supports Australia’s international competitiveness, it also increases import costs, potentially exacerbating cost pressures currently weighing on business confidence.
