Big clue Australia could dodge Donald Trump’s ‘maximum pressure’ tariffs

Donald Trump’s tariff threat sent shockwaves through Australia’s economy, but there is a glimmer of hope that we could avoid the worst of his trade attacks.

When Donald Trump announced hefty tariffs on America’s biggest trading partners this week, the financial shockwaves crashed into Australia immediately.

The Aussie dollar slumped to a seven-month low and billions of dollars were wiped off the local share market.

Ironically, however, the President-elect’s social media pronouncement offered a glimmer of hope that Australia could avoid the worst of his all-out tariff assault in his second term.

That’s because Mr Trump’s opening salvo to Mexico, Canada and China bolstered the belief that he would wield tariffs as a bargaining tool rather than a blunt instrument.

Donald Trump originally promised a universal tariff of at least 10 per cent on all imports to the US. Picture: AFP

During the election campaign, he had promised a universal tariff of at least 10 per cent on all imports to the US, rising to at least 60 per cent for products from China. No ifs, no buts.

And yet, on his social media platform this week, Mr Trump’s threat to implement tariffs straight after his inauguration came with a quid pro quo: the trade taxes would be removed if America’s partners halted the flow of illicit drugs into the US, particularly fentanyl.

“Right now, I see everything that Trump’s doing on tariffs as a negotiating tool,” said Chuck Grassley, one of several Republican senators who are sceptical about their broader use.

Barclays economists concurred, saying they believed the 25 per cent tariff on Mexico and Canada “will ultimately not be implemented”, given that it would “essentially blow up” a 2020 trade deal that was one of the former president’s signature accomplishments.

The Aussie dollar slumped to a seven-month low over the threat of Trump’s tariffs. Picture: istock

One of the President-elect’s own advisers added weight to that theory, bluntly telling the Wall Street Journal: “His whole world view is maximum pressure, it’s that simple … Scare your negotiating partner into thinking you will do what most think is unthinkable.”

Charles Edel, the Australia Chair at Washington DC’s Center for Strategic and International Studies, says Mr Trump’s characteristic unpredictability will undoubtedly have implications “as it reverberates through trade markets, through geopolitics and other areas”.

But he suggests his apparent focus on using tariffs as “a mechanism to force certain policy concessions” will reduce the likelihood that Australian imports could be targeted.

Anthony Albanese has made efforts to ensure Australia dodges the worst of the tariffs. Picture: NewsWire / Martin Ollman

Aiding that view is a point Prime Minister Anthony Albanese raised in his call with the incoming president after his victory: the US benefits from a big trade surplus with Australia.

In fact, according to data released on the day of the election, only three other countries have larger trade deficits with the US than Australia’s $US14.75bn disparity so far this year. America has sent us $26.14bn in exports; we have sent them exports totalling $US11.39bn.

“I certainly think it’s advantageous,” Dr Edel said, “because Trump has consistently complained that trade deficits for the US are detrimental for America’s economic wellbeing.”

“While of course there is the potential of universal tariffs imposed on anyone … the fact that Australia has a trade deficit with the United States seems to indicate that you would potentially want to treat those with deficits and those with surpluses differently, otherwise there’s no motivation or incentive for other countries to change their behaviour.”

Should Australian exporters avoid the imposition of tariffs over the next four years, they also stand to benefit if producers in other countries face higher barriers to the US market.

One in four Australian jobs depend on trade, a line Mr Albanese repeated during the APEC and G20 summits held under the cloud of the Republican’s impending return to power.

The significant downside risk, however, is that a tariff-fuelled trade war would cause broad harm to Australia’s economy.

The Reserve Bank, in a confidential analysis of Mr Trump’s policies before the election that was released this week, suggested the “extreme” version of his tariffs would slow growth, drive down the dollar and potentially force interest rate cuts.

Those fears were evident in this week’s market jitters. With almost two months until Mr Trump is even sworn in, Dr Edel says the world must quickly get used to that instability.

Originally published as Big clue Australia could dodge Donald Trump’s ‘maximum pressure’ tariffs