Chalmers’ grim warning about Trump’s escalating trade war

An escalation of US President Donald Trump’s trade war would strip billions of dollars out of the Australian economy and entrench inflation around the globe, Treasurer Jim Chalmers will warn on Tuesday, while arguing the nation deserves better from “a long-term partner and ally”.

After the OECD downgraded its outlook for the global and Australian economies because of Trump’s tariffs, Chalmers will use a speech outlining key features of next week’s budget to argue America is engaging in an act of economic self-harm that will reverberate around the world.

Jim Chalmers will warn of the economic costs Australia faces through Donald Trump’s trade war.Credit: Alex Ellinghausen/AP

Trump last week imposed 25 per cent tariffs on all American steel and aluminium imports, including almost $1 billion worth of sales from Australia. But he plans to expand his tariffs to almost all imports from early April.

Australia’s large beef and pharmaceutical exports are seen as particularly at risk from the tariffs, which Canada and the eurozone have vowed to meet with their own duties on American goods.

Chalmers, who hands down his fourth budget next week, will reveal the direct impact of the steel and aluminium tariffs will reduce Australian GDP by only 0.02 per cent by 2030.

But the broader impact from just these tariffs, as they ripple through the domestic and global economy, would be closer to 0.1 per cent of GDP, or half the impact of the recent ex-tropical cyclone Alfred.

If the trade war was to widen, the impact would be substantially worse.

“Over a range of scenarios, Treasury found the indirect GDP impacts of a trade war could be up to four times larger than the direct effects of tariffs on our economy,” he will say.

“In a world of retaliation and escalation, the impacts of tariffs are amplified, they linger for longer, resulting in a bigger reduction in GDP and a bigger increase in prices.

“Our response to this will not be a race to the bottom on tariffs. We’ll go for more resilience, not more retaliation because more and higher tariffs would harm, not help, our workers, businesses, industries and economy.”

Chalmers will argue the economic repercussions of Trump’s agenda since he took office have been seismic, declaring the “whole world had changed”.

He will argue the decision of the Trump administration not to exclude Australia from its tariffs was a particularly harsh blow.

“The decision not to exempt Australia from American tariffs on steel and aluminium was disappointing, unnecessary, senseless and wrong, as the PM rightly pointed out,” he will say.

“We are not uniquely disadvantaged by these tariffs, but we deserve better as a long-term partner and ally.

“Tariffs and escalating trade tensions are a form of economic self-harm. They are self-defeating, and self-sabotaging.”

Stacks of aluminium at a port in China. The United States introduced its 25 per cent tariff on all imports.Credit: Bloomberg

That self-harm is evident in the OECD’s interim economic outlook, released on Monday night, which downgraded its forecasts for global growth this year and next while predicting higher inflation.

American economic growth this year is forecast to be 2.2 per cent, a drop of 0.2 percentage points since the OECD’s last report in December. It is worse for 2026, with forecast growth 0.5 percentage points lower at 1.6 per cent.

The organisation said Australia’s growth would “hold up” this year at 1.9 per cent, one of only two major economies not to suffer a direct hit from Trump’s trade war through 2025. But it sliced its Australia forecast for 2026 by a substantial 0.7 percentage points to 1.8 per cent.

Offsetting the slower growth, it expects Australia’s core inflation to fall to 2.4 per cent this year and 2.2 per cent next year, suggesting further cuts in official interest rates.

Declaring that “significant risks remain”, the OECD warned that major changes in global trade policies would “hit global growth and raise inflation” that could force central banks to tighten monetary policy.

“Further fragmentation of the global economy is a key concern. Higher and broader increases in trade barriers would hit growth around the world and add to inflation. Higher-than-expected inflation would prompt more restrictive monetary policy,” it said.

“Central banks should remain vigilant given heightened uncertainty and the potential for higher trade costs to push up wage and price pressures.”

Chalmers’ budget will set out the main economic parameters of Labor’s election campaign, likely to start within weeks.

Opposition Leader Peter Dutton said there was a risk that if the government were re-elected, official interest rates could be pushed back up because of higher inflation.

While Dutton said the Coalition had a history of delivering tax cuts, he signalled they could be off the agenda if they added to inflationary pressures.

“If we can afford to do tax cuts, we will, but it will depend on how much money is in the budget,
what’s going to be inflationary, what other measures are floating around at the time,” he said.

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