US tariffs to spark ‘very big shock’, says RBA chief Philip Lowe

Julie Bishop warns that trade war could erupt over US tariffs, RBA governor forecasts ‘very big shock’ to world economy.

RBA governor Philip Lowe in Sydney yesterday. Picture: AAP

UPDATE: Stocks plunged on Wall St today in response to the resignation of Donald Trump’s economic adviser Gary Cohn as Foreign Minister Julie Bishop warned bluntly that a trade war could erupt over new US tariffs.

Wall St’s Dow Jones index fell more than 300 points in early trade amid fears that Mr Cohn’s resignation removes one of the last pro-free trade voices in the White House, strengthening the hand of populist protectionists in the administration.

Mr Cohn resigned after the president ignored his advice not to introduce 25 per cent tariffs on imported steel and 10 per cent on aluminum.

It came as Ms Bishop issued a strongly worded warning about how the tariffs could create a domino effect, sparking a trade war which would hurt Australia an the region.

“We should learn the lessons of the benefits of economic openness, and reflect on the pitfalls of protectionism,” Ms Bishop told a meeting at the Asia Society in New York today. “Some of the risks of closing markets are very much in our minds today, as a dispute over steel threatens to widen.

“For the past 70 years, the US has been the most critically important supporter of openness and the rules-based system on international trade. This support has underwritten prosperity – in the US and globally.

“If the current dispute widens, and action leads to counter-reaction, we might see a downward spiral that could put at risk the open trading environment and that would harm us all.”

Her comments came amid reports that the European Union is preparing to retaliate against the US tariff decision. Mr Trump reportedly want to sign a presidential proclamation on the tariffs as early as tomorrow, ending any faint hopes that allies such as Australia may yet be exempted from the move.

US tariffs to speak ‘very big shock’

Reserve Bank governor Philip Lowe has forecast a “very big shock” to the world economy if US President Donald Trump proceeds with tariff increases on steel and aluminium, his warning coming hours after the top economic adviser in the White House quit over the policy.

Dr Lowe labelled Mr Trump’s tariffs plan “highly regrettable and bad” as share prices dropped sharply following the resignation of adviser Gary Cohn, fuelling confusion over US trade policy.

Malcolm Turnbull also criticised the Trump plans yesterday, arguing the US President would be hurting his own citizens.

Two weeks after visiting the President and US governors in Washington DC, the Prime Minister said history had taught that “there were no winners in trade wars”, contradicting Mr Trump’s earlier declaration they were “good” and “easy to win”.

“A trade war is a race to the bottom that makes us all poorer, leaves our citizens with less choice and fewer opportunities,” Mr Turnbull told a business conference in Sydney yesterday.

Dr Lowe, in unscripted remarks after a speech about non-mining investment growth, said the President’s tariffs plans had been “highly regrettable and bad”.

His comments followed timid criticism from US Federal Reserve officials last week, including from Mr Trump’s new Fed chairman Jerome Powell, who said tariffs “weren’t the best approach” to ameliorating struggling industries’ problems. “If it’s just confined to the current higher tariffs on steel and aluminium, then I think it’s manageable … but this could turn very badly, though, if it escalates,’’ Dr Lowe said.

“If we see retaliation and a counter-retaliation, this could turn into a very big shock for the global economy.

“The best thing for everyone to do, perhaps even the hardest thing to do, but the best thing to do is just to sit still and do nothing, to not respond and to continue advocating for open trade.”

Blue-chip US stocks are expected to fall more than 1 per cent today after Australia’s equivalent index of 200 large companies closed 1 per cent lower yesterday.

In a series of tweets last week that fulminated about the “$800 billion trade deficit” in the US, Mr Trump announced tariffs of 25 per cent and 10 per cent on US steel and aluminium imports, currently worth about $US46bn. The US Commerce Department had earlier suggested the imposts were justified on the grounds of national security.

Mr Turnbull confirmed the government was still lobbying the White House for exemptions for Australian steel and aluminium exports.

“The consequence of imposing a tariff on Australian steel to the west coast would be simply one of putting up the price of building in California, at the expense of Californians and other west coast states,” he said.

The Prime Minister and Mr Cohn spoke at a bilateral meeting with Mr Trump during Mr Turnbull’s visit to the US.

Justin Wolfers, an Australian economist and professor at the University of Michigan, said the resignation of Mr Cohn, a former Goldman Sachs banker and renowned globalist, was a disaster for global economic policy that “substantially increased the odds” that the US would launch a trade war. “Cohn was also the voice of reason on international trade, pushing back against the worst of the President’s protectionist and isolationist instincts,” Professor Wolfers said. He suggested investors were right to mark down equity prices. The EU has already flagged retaliatory tariffs on Harley-Davidson motorcycles.

Former White House trade economist Chad Bown said in a research note for the Peterson Institute for International Economics that countries affected by the new US tariffs would be able to retaliate if the World Trade Organisation found the claimed “national security” justifications were baseless.

“The complaining country typically has discretion to determine which products to target,” Mr Bown said.

Countries affected — primarily Canada, the European Union, Mexico and South Korea — would be able to impose retaliatory tariffs of up to $US14.2bn a year on US imports, which would be the largest retaliation since the establishment of the WTO in 1995.

“Less than 6 per cent of the value of the $46bn in steel imports affected by the planned tariff come from China, according to the analysis,” Mr Bown said.

Mr Turnbull spoke to Japanese Prime Minister Shinzo Abe about the Trump trade measures on Tuesday. Japan and Australia have championed free trade in resurrecting the Trans-Pacific Partnership. Trade Minister Steve Ciobo will sign the TPP-11 agreement in Santiago early tomorrow.

Mr Ciobo said new export opportunities created by the deal would help “drive Australian jobs”.

The TPP-11 would create Australia’s first free-trade agreements with Canada and Mexico, Mr Ciobo said, and deliver exporters preferential access to two of the world’s top 20 economies for the first time. The TPP-11 signing will include officials from Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Scott Morrison yesterday warned against “alarming Australians” about the US move on tariffs, and lauded the Prime Minister’s expertise on trade matters. “The government is keeping its head and I think it’s very important that everyone else keep their head on this … I don’t think we should be alarming Australians about this,” the Treasurer said.

Labor has offered the government its full support in rebuffing the new tariffs, which affect steel exports from firms such as BlueScope. Foreign Minister Julie Bishop, who is in New York to sign a maritime boundary deal with East Timor, said she was seeking an urgent meeting with Secretary of State Rex Tillerson to discuss the trade move.

Additional reporting: Joe Kelly