- The impact on Australia of Donald Trump’s new steel and aluminium tariffs is likely to be limited, although it will probably cost jobs and drag on investment.
- What Australia really needs to worry about is escalation into a broader trade war with unpredictable consequences for Australian exporters.
The breakdown of the long-standing consensus on global trade is hitting home. US President Donald Trump is dragging the world closer to a potential trade war.
His 25% import tariff on steel would have a limited impact on Australia but any further potential flow-on effects from retaliatory measures by the European Union and China — which combined with the US account for the vast majority of Australian trade markets — are hugely uncertain.
European Commission president Jean-Claude Juncker told German TV on Friday the EU would consider retaliatory tariffs on “on Harley-Davidson, on bourbon and on blue jeans”.
“We are here and they will get to know us. We would like a reasonable relationship to the United States, but we cannot simply put our head in the sand,” Juncker said.
Beijing is warning of consequences, too. A Chinese foreign ministry spokesman, citing comments from the Ministry of Commerce’s trade remedy and investigation bureau, was quoted in the state media as saying: “The US has over-protected domestic products by taking anti-dumping and countervailing measures to most steel and aluminum imports.
He added: “If every country begins to do the same as the US did, it would severely affect the international trade order.” The state-backed Global Times, in an editorial, warned (emphasis added):
It would be unimaginable for Trump to raise tariffs in various sectors akin to building an economic wall, behind which the US resurrects an array of enterprises more expensive than the world average. By then, US commodity prices would increase and its exports would suffer, making the superpower a strange country.
Trump is incapable of pushing such a “reform,” as it will meet with huge opposition in the US, and the world will not allow it.
Trump may receive more support than opposition in a short period with these policies which would help with his reelection. However, it will be at the cost of the US’ long-term interests.
Limited impact, for now
The impact of steel tariffs, including on Australia and its biggest trading partner China, would be limited if that were to be the end of the matter. But with Trump threatening in a tweet to slap a tax on European cars over the weekend after Juncker’s comments, there’s now clear potential for escalation, resulting in higher costs for consumers and lower global growth.
A trade war limited to US-China relations could lead to Australia staring down the loss of 20,000 jobs and a reduction in investment of 4 per cent over the next decade, according to Kristian Kolding and Chris Richardson of Deloitte Access Economics, who have modelled the scenario and set out their findings in the Australian Financial Review:
Yes, the world economy would take a hit, which would see lower prices for Australian exports such as coal and iron ore. But the resultant weaker world growth and lower commodity prices would hurt the Australian dollar more than most other currencies, meaning the local currency would fall against the $US in the first year.
The Reserve Bank would try to help, but it doesn’t have much ammunition – the official cash rate is already at record lows – though the Bank may be able to use lower interest rates to coax a bit extra out of both house prices and housing construction.
Yet the defence against the downturn afforded by lower interest and exchange rates here in Australia would only ease the pain – not eliminate it. That’s because the increased uncertainty flowing from a trade war would see businesses in Australia more cautious about laying out their cash, leaving their investment some 4 per cent lower than otherwise over the next decade.
The result is that there would be more than 20,000 fewer people working in Australia by late 2019.
But a broader trade war would be messy and could further depress demand for Australian exports. How Beijing decides to target the US is extremely difficult to predict, as would be any further response from the EU or other countries.
Shane Oliver, head of investment strategy and chief economist at AMP Capital, said described Trump’s steel and aluminium tariffs as “bad policy at a bad time” which would “only add to the risk of a trade war”.
“In terms of whether we see a global trade war or not, China is the country to watch given that the US is also looking into taking action against it in terms of intellectual property, but apart from loudly protesting its likely to be relatively restrained in terms of retaliation preferring to work with other countries in mounting a WTO challenge and develop its image as the “good guy” in terms of supporting free trade,” Oliver wrote in a client note.
He added (my emphasis):
Out of interest only 1.6% of China’s steel exports and 16% of its aluminium exports go to the US (equal to a total of just 0.03% of its GDP) so the direct impact on China will be modest, which in turn should mean a relatively modest impact on Australian miners. Countries most exposed are Canada and Brazil. Australia is not a significant exporter of steel or aluminium to the US, but it’s vulnerable should a global trade war break out given the impact on our export markets like China.
Australian trade minister Steve Ciobo spoke to his US counterpart Wilbur Ross and has been pressing Australia’s case for exemptions, similar to those secured under the Bush administrations steel duties imposed in 2002. But it doesn’t appear to be a path the White House — with its preference for simplicity in policy — wants to tread.
Peter Navarro, director of the White House National Trade Council, said on Sunday the tariffs would be signed this week or next week at the latest and that “the general consensus of the president was … they should be across the board without country exemptions”.
“As on as you exempt one country, you have to exempt another country, and so … it’s a slippery slope,” Navarro said.
Indeed. There are slippery slopes everywhere on this issue.
Trump is determined, and clear about how he wants the steel tariffs to work. The initial effects will be limited but Australia needs to watch for signs of escalation closely: if a tariff on steel — worth only a few hundred million in exports — can cost tens of thousands of jobs and depress investment because of the impact on certainty, then the impact of a broader trade war is absolutely something Australia should be concerned about.