How trade barriers herald a downturn for the Australian economy
By Anthony Sims
Recent movements in global markets would have even the most amateur of investors concerned. As one example, the NASDAQ has fallen by over 12% in the past month. Normally, the NASDAQ increases by that amount in a year, so these movements are certainly far from normal. Equity markets have historically indicated strong long-term growth, so it goes without saying that the performance of the past six months is uncharacteristically poor. But why?
American media outlets have been quick to brand this trend as the ‘Trump Slump’, and it’s easy to understand why; circulating between the tabloids are tariff threats, concerning inflation data, falling US consumer spending, and fears of a shutdown of the US Government. Whisperings of a recession have amplified to discernible talking points. S&P500 futures have made fallen sharply, indicating a decline in the level of US economic output, and spending cuts will only exacerbate the impact on aggregate expenditure.
But so what? Many everyday people feel far removed from the merchant banker gobbledegook of Wall Street and could care less. But this volatility doesn’t just mean institutional investors are losing money – it rocks the foundation of Australia’s supremely revered, compulsory insurance against retirement bankruptcy, superannuation. For many young people, super can be quite an ‘out of sight, out of mind’ consideration, but it’s important to be mindful of how small changes in the short term can have compounding effects over a greater time horizon. For superannuation portfolios with greater exposure to growth assets (and therefore risk), this means greater losses, and naturally, bigger balances will lose more – boomers going bust.
Thankfully for Australia, while the effect of these policies on stock markets is tangible, the impact on trade is minimal. Australia exported $374bn of goods in 2023, and aluminium and steel exports to the US collectively form about $1bn (or 0.27%) – a relatively small sum. The greater concern lies with the indirect impacts of these policies. A rise in US prices will cause a decrease in US demand for aluminium and steel, which will decrease the global demand and thus the world price for raw resources used to produce these materials. As Australia is responsible for over a third of global iron ore production (the raw form of steel), it goes without saying that reduced demand and falling commodity prices is a deadly combination for our biggest industry and primary economic driver, and the knock-on effects within the economy will add insult to injury.
Pull quote:
“I always say tariffs is the most beautiful word to me in the dictionary. And I was reprimanded by the fake news. They said, what about love, religion and God? I said, I agree. Let’s put God number one, let’s put religion number two. Love, I don’t know, we’ve got to put that number three, I guess, right? And then it’s tariff. Because tariffs are going to make us rich as hell, it’s going to bring our country’s businesses back.” – US President Donald Trump
Furthermore, the 20% tariff imposed on China affects $430bn of US imports. Reduced demand for Chinese exports will reduce Chinese demand for foreign imports as the Renminbi weakens. This is more alarming news for Australian producers, as China accounts for over a third ($137bn) of Australian exports, and this value will fall as demand for Chinese goods falls. Keep in mind that things will likely get worse before they get better – late last year, Trump’s campaign originally promised 60% tariffs on China. Falling exports means a weaker Australian dollar (more expensive imports), slowed economic growth, increased unemployment and supply-side inflation. Considering Australia’s current state of economic malaise, these impacts indicate a further downturn in economic output.
It’s easy to point to these policies and attribute blame to misinformed individuals in power. Trump established trade barriers in his first term with limited success, and Biden kept and even expanded upon many of them. The basis of this is political rather than economic, as many US voters view tariffs as beneficial to the economy when this is not the case; barriers to trade create net negative economic outcomes. These tariffs will indeed generate substantial revenue for the US government, but this comes at the cost of the domestic consumer’s purchasing power. US producers which rely on imported components will be subject to the tariffs and consequently forced to raise prices, so there is a limited argument to be made for the protectionism of domestic industries. So while the effects certainly won’t go unnoticed in Australia, at least our own politicians are sensible enough to know better, right?
Well, as it turns out, maybe not. Perhaps the most jarring part of this saga for us down under is the recent emergence of the aptly named ‘Trumpet of Patriots’ political party. Queensland businessman Clive Palmer is doubling down on his political career with dubious efficacy, and recently revealed some of his stances in a media release entitled “Australia needs Trump policies to restore prosperity”.
In terms of economic policy, at least, this could not be further from the truth! Contrary to Palmer’s assertions, it is without a doubt that Australians have benefited from trade liberalisation from increased foreign investment and reducing the cost of imports and therefore cost of living. Even in terms of social policy, a freedom-loving individual such as Palmer would do well to take a note from Adam Smith, who described free markets as “an obvious and simple system for natural liberty” – echoing the old adage ‘the freer the market, the freer the people’. Keynesian theory establishes a clear albeit limited role for the government within the economy, and I suspect that in due course, many Trump voters will struggle to reconcile their own libertarian economic views with a notably protectionist administration which is overstepping those boundaries. Although Palmer has not published any specific trade policy, his base may be at a similar crossroads.
Regardless of your perspective on Trumpism more broadly, recent economic policy decisions in the US create objectively negative outcomes for America and the world. To mitigate the effects domestically, the sensible policy decision for Australia is to resist making reciprocal tariffs and instead independently negotiate a deal with the US. In fact, the only trade barrier that may benefit Australia is restricting the import of Trumpist economic policy, and Trumpet of Patriots sounds like a misheard title for the heralding of protectionism and economic woes. But if Trump sticks to his guns and current trends continue, a US recession is inevitable, and could very well spread to other parts of the world. But who knows – perhaps the Strategic Bitcoin Reserve will save us…