Trump is intensifying his trade war. Australia may not be immune

Donald Trump’s trade wars are intensifying and broadening, and this time, it appears Australia’s exports to the United States may not be immune.

While flying to New Orleans for the Super Bowl, Trump told reporters he would impose 25 per cent tariffs on steel and aluminium imports from all countries without giving a date for their implementation.

Australia will likely seek exemptions from Donald Trump’s tariffs, but there is no certainty he will grant them. Credit: AP

He also said he would announce new reciprocal tariffs (matching tariffs other countries impose on imports from the US) later this week.

Those announcements came even as China’s $US14 billion ($22.4 billion) of tariffs on imports from the US and restrictions on exports of critical minerals announced a week ago in response to Trump’s 10 per cent duty on all China’s exports to the US, came into effect.

When he was last in office, Trump put a 25 per cent levy on steel imports and a 10 per cent rate on aluminium imports but exempted those from a number of close trading partners, including Australia, one of the few countries with which America has a trade surplus.

With more than $1 billion of export revenue exposed to the proposed new tariffs (about $640 million of steel exports and $440 million of aluminium exports last year, according to US trade data), the Albanese government will no doubt seek similar exemptions, using America’s trade surpluses, defence alliance and capacity to supply strategic minerals to argue for exclusion from the new tariffs’ coverage.

Given that Trump was prepared to threaten his two major trading partners, Mexico and Canada, with tariffs (only to pause them after they made some relatively painless concessions on border security and fentanyl policing), there is no certainty that he will provide any exemptions this time.

Where in 2018, Trump’s tariffs were predominantly deployed against China, with a bit of a sideswipe at Europe, this time, he plans to use them as a multipurpose tool: as retaliation for the perceived unfair trading practices of other countries, particularly China and those in the European Union; as a threat to force Canada and Mexico to shrink the flow of illegal immigrants into the US and for those countries and China to co-operate in choking the supply of fentanyl; and as leverage to coerce/attract industries to invest in the US to avoid the duties and as a major source of revenue for the US.

Trump thinks tariff “is the most beautiful word in the dictionary” and believes other countries’ trade surpluses with the US are evidence that America is being ripped off. He also wants the revenue from tariffs to pay for his tax cuts for companies and the wealthy, and announced during his election campaign that he would impose a baseline tariff of 10 to 20 per cent on all imports to the US and a 60 per cent rate on imports from China. But he seems to be backing away from that pledge.

Australia exported more than $1 billion worth of steel and aluminium to the US last year.Credit: Jessica Shapiro

On Friday, he said he now preferred reciprocal tariffs to “flat” tariffs, saying he thought that was “the only fair way to do it”. A universal baseline tariff would inevitably have led to retaliation from those countries impacted. It is somewhat more difficult to retaliate against matching tariffs.

The highest tariffs levied (other than those imposed by the US) tend to be in small nations that have a minute presence in global trade, but Trump has singled out the EU and Japan, both of which have sizeable trade surpluses with the US.

Last week, he said tariffs on imports from Japan were an option, and the EU would “definitely” face tariffs “pretty soon”.

He has indicated that he is open to a deal and that he might not impose tariffs if countries agree to buy more US products, particularly its oil and gas.

The flurry of activity on trade sanctions comes despite Trump’s commissioning of a review of US trade and economic policies, focusing on trade deficits, unfair trade practices and the impact of existing trade agreements. That review, with its recommendations, is scheduled to be completed by April 1.

Not surprisingly, the seemingly ad hoc nature of Trump’s announcements of tariffs – well before the results of his review are available – has caused chaos, confusion and some abrupt about-faces.

While Mexico and Canada’s concessions on border security and fentanyl (mainly moving some troops to their borders and Canada’s appointment of a fentanyl “tsar”) were the reasons given for pausing the tariffs on their exports to the US, the howls of outrage from American companies might also have been a major factor.

Large parts of the American auto industry, which is heavily integrated with Mexico’s, might have shut down, and a number of US oil refineries that depend on Canada’s heavier crude oils might also have been severely affected.

Similarly, Trump has had to back down on his removal of the exemption of small parcels – goods worth less than $US800 ($1277) – from his tariffs on China.

China is the biggest target of Trump’s trade war. Credit: Bloomberg

Those tariffs, supposed to come into effect last week, had to be suspended because the US Postal Service and the US Customs and Border Protection agency don’t have the systems to inspect the billions of small parcels that have been flowing into the country (there were 4 billion last year) and assess them for duty.

The fastest-growing source of those small parcels has been China, with Shein and Temu experiencing explosive growth in the US. They accounted for about 30 per cent of all small parcel exports to the US last year.

Had the new tariff not been paused, the Chinese e-commerce giants would have faced not just the 10 per cent tariff on all imports from China but the pre-existing tariffs of up to 25 per cent that Trump imposed on China in 2018 and which the Biden administration retained.

It would seem that Trump announced the tariffs without anyone thinking through the logistics of their imposition.

The seemingly ad hoc nature of Trump’s announcements of tariffs – well before the results of his review are available – has caused chaos, confusion and some abrupt about-faces.

The practical difficulties and costs of collecting duties from such massive volumes of relatively low-value items were the reasons for the exemption, which dates back to the 1930s. Most countries have similar exemptions from tariffs for similar reasons.

Now, the US Postal Service and Customs and Border Protection are planning to create “an efficient collection mechanism” that “doesn’t disrupt deliveries of the packages from China”. Good luck with that.

China’s response to Trump’s additional 10 per cent tariff, ostensibly because of its role as a supplier of fentanyl precursors, went live at the weekend. Where the new Trump tariffs cover about $US450 billion of China’s exports, China announced the tariffs on only about $US14 billion of imports from the US last week.

China had delayed their implementation in the hope that, as had occurred with the Mexican and Canadian tariffs, it could negotiate a deal.

No talks were held, and China has therefore gone ahead, not just with the tariffs of 10 to 15 per cent on US oil and gas, farm equipment and some auto industry products, but with more restrictions on exports of strategic minerals as well as an antitrust investigation of Google. It is also considering whether to launch an inquiry into Apple’s App Store policies and fees.

China dominates the production and refining of minerals critical to defence-related industries, electric vehicle batteries, semiconductors and solar panels. It produces more than 60 per cent of the world’s rare earths and has a near-monopoly on their processing.

The new Chinese tariffs – as occurred in 2018, when Trump imposed tariffs on about $US360 billion of China’s exports – are highly targeted to industries important to states that voted strongly for Trump and the Republicans at last year’s elections.

While China’s response is relatively modest relative to the impact of Trump’s tariffs (perhaps to avoid an escalation or to preserve firepower if the trade tensions do escalate), it is an example of how countries on the wrong side of the trade equations with the US can counter his tariffs using asymmetrical measures that have effects on the US economy and politics that are disproportionate to the revenue involved.

China might be the biggest target in Trump’s sights, but even some of America’s closest (pre-Trump) allies will be considering their responses if they, too, find their exports scapegoated for America’s stretched finances, its low national savings rate and its trade imbalances.

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