‘Day of reckoning’: Global recession fears spread as Donald Trump’s brutal tariff plan looms

The world could be lurching towards brutal global recessions, with a key Trump administration deadline now just a few hours away.

COMMENT
Donald Trump, King of America, is about to launch his “Liberation Day” of “reciprocal tariffs”.

Australia is in line for hits for its subsidies of agriculture and pharmaceuticals, plus its GST.

Does any of this make any sense?

Orange madman

The answer is no.

Including the GST as a “behind the border” subsidy is absurd.

Australia’s goods and services tax is non-discriminatory.

It applies equally to locally produced and imported widgets, so the best way to understand its inclusion, if it is included, is that it is nonsensical and maybe a scam.

US President Donald Trump is about to launch his ‘Liberation Day’ of ‘reciprocal tariffs’. Picture: Brendan Smialowski/AFP

Australian farm subsidies are also tiny, some of the smallest in the world, though we are rather adept at applying “behind the border” protections such as quarantine and single-desk buying of imports.

The Pharmaceutical Benefits Scheme (PBS) is one of these, but no pollie is about to give that away.

It is going to be a near-impossible task to quantify these, so I wish the American Treasury good luck.

What’s the hit?

Overall, the reciprocal tariff on Australia is not likely to be large so long as it is rational, which is not guaranteed.

The larger hit is more likely to come from the broader impacts on the global economy, especially China.

Australian steel and aluminium are not exempt from Mr Trump’s tariff plan. Picture: Glenn Hampson

China does massively subsidise its export sectors in myriad ways, from cheap lending to a cheap currency, so the outcome for it, as well as the EU, will be pivotal to global growth.

Investment banks are downgrading global growth all over the place to account for this hit, and there are already signs that Australia’s key commodities are feeling the pressure owing to it.

In a new report out this week, global investment bank Barclays has claimed April 2 – the date the world will learn the scale of the new tariffs the US is proposing – will be a “day of reckoning” that could lead to recessions around the world if mismanaged in America and other countries.

Barclays has also sharply cut global economic growth forecasts to 2.9 per cent from 3.3 per cent in 2024 as a result.

Barclays has claimed April 2 could be a 'day of reckoning' that may spark recessions across the globe.

But the bank is convinced that if worst-case outcomes on tariffs are realised, even those forecasts may end up being too optimistic – and if more trade wars and policy chaos ensue, growth could slow much further, and a 2025 recession across the world’s developed economies could become a realistic proposition.

However, on the upside, the fact that reciprocal tariffs will hit large export jurisdictions harder means they will be looking for new markets for their goods and services.

That means discounts for Australian buyers, so the impact here is likely to be deflationary as both export and import prices fall.

Plan or chaos?

There are features of plan and chaos in all of this.

Clearly, the Trump administration is keen to repatriate critical global supply chains into America.

It has argued that this is central to restoring the American middle class, such that its huge income inequality is mitigated.

Whether this is true or not, only time will tell.

But tariffs have also become some kind of tool dejour.

They are being used to bully perceived American enemies into various geopolitical outcomes. They are being used to help fight the war on fentanyl.

They are being used to reinforce stronger American borders against illegal immigration.

They are being used to try force peace in regions of war.

Within this chaos are the seeds of the real downside risk.

If businesses become so confused about where they are going to produce, buy and sell their wares, then there is not inconsiderable risk of a stall in business investment everywhere.

It is this worry that is contributing to selling in equity markets worldwide.

Scrap the FTA?

What can Australia do?

Aside from a recent surge in gold exports (as Americans seek protection from Donald Trump), Australia has run a large deficit with America forever.

We could make this argument clear and keep doing so.

Australia has run a large deficit with the US forever.

We might also point out the Free Trade Agreement, which is anything but.

This Howard-era dinosaur has cost Australia billions because it has already watered down PBS rights.

If Mr Trump is too aggressive, we could threaten to tear up the FTA, though that would come with geopolitical cost.

We could also offer to withdraw Kevin Rudd, whom Team Trump does not like, from his role as ambassador of Australia to the United States in exchange for commercial dispensations.

In the end, Donald Trump Liberation Day looks a lot more like Bullying Day to everybody else.

It would be the ultimate irony if Donald Trump became so disruptive that he disrupted himself just as his plan for fiscal consolidation lands on markets.

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geopolitics and economics portal. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.