Economic turmoil created by Trump’s tariffs will affect everything from coffee to interest rates

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It’s difficult to imagine who was more surprised by Donald Trump’s tariff war – the penguins of a sub-Antarctic volcano thrust into a global spotlight or Australian mortgage holders who may be delivered deep interest rate cuts because of the economic damage wrought by the US President.

The turmoil caused by Trump’s “Liberation Day” has been more wide-ranging than even the president could have expected.

President Donald Trump holds a signed executive order during an event to announce new tariffs in the Rose Garden of the White House on Wednesday.Credit: nna\KCampbell

From landlocked Lesotho, stung with a 50 per cent tariff, to the uninhabited Australian territory of Heard and McDonald Islands which last exported anything in 1877 but is now facing a 10 per cent impost, the list of “nations” on Trump’s hit list stunned the globe.

How will Trump’s tariffs affect the global economy?

In the 24-hours day after the announcement, more than $US3.1 trillion ($4.9 trillion) was wiped from the value of the American share market, the oil price tumbled by 7 per cent and gold hit an all-time high.

American consumers, now waking up to what tariffs mean, started fretting about what it would do to a morning coffee (a 10 per cent tariff on Brazil, the largest source of coffee beans to the US) to a slice of pound cake (Madagascar, which supplies most of the world’s vanilla, faces a 47 per cent tariff).

On Tuesday, the Reserve Bank had held official rates steady at 4.1 per cent with expectations it might deliver two more rate cuts this year. By Thursday afternoon, its report into the financial stability of the nation used the word “uncertainty” on 21 separate occasions while markets had penciled in a cash rate approaching 3.1 per cent by Christmas.

Politically, Trump’s decision was perhaps the biggest intervention by a US president in an Australian federal election since Lyndon Johnson visited the nation in October 1966 to effectively endorse Harold Holt who would lead the Coalition its largest ever victory.

The economic turmoil is being driven by two factors. Trump’s plan upends how the globe has operated – and grown – since the 1940s. It also means huge financial shocks that will filter through governments, businesses and consumers.

The biggest hit will be borne by Americans.

The Budget Lab at Yale, a non-partisan research centre, estimates the tariffs announced this week will lower American economic growth this year by 0.5 percentage points. In the long term, it puts the permanent annual cost at between $US100 billion to $180 billion.

You can see how it comes to such a large number. It reckons the tariffs on countries that supply many of America’s clothes – such as Bangladesh (tariff hit of 37 per cent) – will push up apparel prices in the US by 17 per cent.

Overall inflation is 2.3 per cent higher this year, delivering an average loss per household of $US3800. For the poorest households, who have an average annual income of around $US16,000, the hit is $US1700.

America’s average tariff rate was 2.7 per cent before Trump’s announcement. It is now 22.5 per cent, the highest level since 1909. In that year, America export $US1.9 billion worth of goods. Last year, it was $US2.1 trillion.

Fitch Ratings chief economist Brian Coulton summed it up like this.

“Tariff hikes will result in higher consumer prices and lower corporate profits in the US. Higher prices will squeeze real wages, weighing on consumer spending, while lower profits and policy uncertainty will act as a drag on business investment,” he said.

Coulton also noted that the Federal Reserve, which would ordinarily cut interest rates to spur growth, will be less likely to do so because of the inflationary impact of tariffs.

Could the tariffs spark a recession?

This is why the chances of an American recession this year are now put at one-in-two by economists and financial markets.

The direct hit to the Australian economy is relatively muted. Yes, the country exports a lot of hamburger beef to the US, something that caught the attention of the famously Big Mac eating president.

But in this case, the cost of the 10 per cent tariff on Australia will be borne by Trump and every other hamburger loving American. The same American fans of South Australian lemons ($44,000 in 2024) or Victorian olive oil ($16.1 million).

The problem, particularly for Australia, is what it may do to China.

Credit: Matt Golding

In value, Australia sends more to the European Union than the US. And both are nothing close to our two-way trade with China which last year reached a record $325 billion.

Under Trump’s tariffs (which build on tariffs he imposed in his first term and those put in place by Joe Biden), the effective tariff rate on Chinese products is approaching 70 per cent.

Trump has also slapped high tariffs on countries where Chinese businesses have moved their operations to avoid earlier American imposts. For instance, Vietnam (46 per cent) and Cambodia (49 per cent) are being hit.

Will it make products in Australia cheaper or more expensive?

These countries are also home to the production plants of companies like Nike, whose share price nose-dived 14 per cent after the tariff plan was revealed.

China’s Commerce Ministry has signalled retaliatory action against the US. In Trump’s first term, China targeted American farmers that forced the president to bail them out. This time, it could be much larger.

China could be forced into selling its products into other nations. Such low-cost goods could end up in nations such as Australia, and is one of the reasons Anthony Albanese (and immediately matched by Peter Dutton) promised to put more money into anti-dumping arrangements.

Those anti-dumping measures, and the reverberations across the world economy, won’t worry the seals and penguins of Heard and McDonald Islands who have become surprising global media stars after being hit with their own tariff.

What do the tariffs mean for my interest rates?

But it also points to the problem ahead for the Reserve Bank. With Australia not retaliating with its own tariffs, inflation – and growth – is likely to be lower.

There is now a very good chance the RBA will cut official interest rates at its mid-May meeting and follow that up with at least two more rate cuts by November.

Those lower rates, however, will be only offer small respite if the global economy stumbles because of Trump’s actions.

Famously, the Great Depression started because of a huge run on Wall Street in late 1929. But it was a huge increase in American tariffs the following year that consigned the US – and the rest of the world – into its deepest economic downturn.

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