Trump ‘Liberation Day’ was expected but full of risk

For Australia, two things are clear in the wake of Donald Trump’s “Liberation Day” tariff extravaganza; we are not the target of US hostility but we will not escape unscathed. Australian exports to the US will be hit with a 10 per cent tariff while other countries will face higher penalties. These include China (34 per cent), Japan (24 per cent), the EU (20 per cent) and India (24 per cent). And on the list goes. The extent of the collateral damage we experience will depend on our ability to diversify our trading opportunities, as well as how the countries that are truly in Mr Trump’s sights respond. This is particularly the case with our major trading partner, China, which has been hit directly and through the high tariffs placed on third nations such as Vietnam and Thailand, which had been used by China to circumvent tariff penalties imposed in the first Trump presidency.

Given the fact our beef exports can continue to the US, despite earlier fears they would be stopped, Anthony Albanese’s decision not to retaliate in a reflexive way is wise and understandable. It is also correct for him to say the tariffs against Australia are unfair and not the actions of a true friend, given we currently are one of very few countries that has a trade surplus with the US. We must also not allow ourselves to be bullied in areas of national interest. These include the Pharmaceutical Benefits Scheme, which makes medicines more affordable for everyone; biosecurity, which is there to protect our national income beyond the US exports; and our cultural obligations to police the impact of the big social media companies on our values and citizens. Peter Dutton is also correct to say the Prime Minister must do “everything he can” to talk to the US President in light of the tariffs announcement.
● The Trump effect. That said, we must also recognise that Mr Trump is doing exactly what he said he would during the US presidential campaign. He is delivering a global disruption that he says – and there are plenty of doubters – will Make America Great Again. Announcing the Liberation Day reforms, Mr Trump harked back to an era of unchallenged US global power at a time before domestic income tax when imported goods were tariffed. Mr Trump says his reforms will rebuild the shuttered factories and force the world’s major manufacturing companies to return production capacity to the US. He is responding to a lot of the concerns that are familiar to Australia. These include a loss of national capacity in vital industries that leaves citizens exposed in the event of hostilities. This was demonstrated throughout the Covid-19 pandemic with the supply of medicines and equipment, and is particularly pressing in Australia regarding fuel security. Mr Trump made a point of saying that the US used to be 100 per cent responsible for the manufacture of semiconductors but that capacity has now shifted to Taiwan. Big US unions covering auto-making and transportation are backing Mr Trump’s approach.
●Economists are not buying it. Mr Trump’s approach goes against economic orthodoxy that says tariffs will increase the cost of goods domestically and result in reduced supply. They will drive domestic inflation and divert investment funds away from more productive areas. The theory of globalisation is that when goods can be bought more cheaply from elsewhere, they free economies to innovate and grow. As The Wall Street Journal notes, Mr Trump’s actions are an attempt to remake the US economy and the world trading system. Mr Trump is making a deliberate decision to transfer wealth from consumers to businesses and workers protected from competition behind high tariff walls. The conventional view is that over time this will mean the gradual erosion of US competitiveness. The lesson from history is that tariffs blunt competition and invite monopoly profits, while reducing the need to innovate.
●The markets don’t like it. The immediate response of financial markets was to sell off in response to the Trump plan, with billions of dollars wiped from the value of global shares and futures markets. Volatility is to be expected given the conflicting detail about how the tariff plan will be managed. Unclear is to what extent Mr Trump will use the tariff arrangements to leverage other outcomes with impacted countries, which may reduce the disruption to trade. Also unclear is exactly how the tariffs will be applied and collected. Mr Trump has suggested that export nations will pay the tariff, and has promised a “department of external revenue” to collect it. Economists dismiss this as wordy cover for the fact that the impost will be directly on US consumers and is usually paid by the US importers of the goods rather than the seller. Mr Trump has been upfront about what he says will be a possible short-term economic shock but he says this will be worthwhile because of the long-term benefits to employment and US self-reliance.
●Unintended consequences. Reality has a way of catching up with the best-laid plans, however. At risk are the export profits of major US corporations, which could be hit by retaliatory import restrictions. About 40 per cent of revenue for the US top 500 companies comes from exports. The withdrawal of the US from longstanding trading norms also plays into the hands of China, which has been working hard to break the global rules-based order. How China responds will determine in large measure what impact the new US trade regime will have on Australia. There could be some benefit in the redirection of goods that would have gone to the US resulting in lower prices. It could also lead to unfair competition for local producers and disrupt China’s fragile economic stability, and undermine our own exports of raw materials that have helped to underpin China’s economic transition.
●The bigger picture. The tariff decision cannot be seen outside the bigger geopolitical forces at play. The US wants to send China a message. However, just how President Xi Jinping will react to greater economic uncertainty at home to protect his political position is unknown and fraught.

The Trump tariff regime also sends a message of US withdrawal that opens the way for China to extend its diplomatic reach. If this is true, this is bad news for global stability and something for which the US, and certainly Australia, could pay a very high price long after Mr Trump has left the scene.