As Australia’s chief voice on foreign affairs, Penny Wong has sought to project calm in the wake of Donald Trump’s tariffs – both those threatened and applied. “This is consistent with what President Trump said he would do,” was the Foreign Minister’s repeated message this week. “He was very clear during the election campaign about his agenda.”
But what Wong can’t yet answer, and has also been asked, is whether Australia can “guarantee” it will not be the target of an economic fusillade from the new administration.
Such a question is premised on the notion that Australia should seek special treatment, which is a problematic assumption. With Trump wielding tariffs as a coercive tool, it could be less about seeking an exemption and more about being asked (threatened) to change policies in a way that suits US interests.
Trump has already shown he is willing to use tariffs to coerce countries to change their policies. The 30-day pause in the 25% tariffs for Canada and Mexico was in exchange for commitments to strengthen their border controls to reduce the flow of migrants and fentanyl. Trump has threatened the European Union with tariffs, as yet for unspecified reasons. However BigTech has a long list of demands to unwind EU digital regulation. What might the United States demand of Australia, and what tariffs might be used as a coercive tool?
Australia has a trade deficit with the United States, as Wong has also repeatedly stressed in her remarks. Under Trump’s interpretation of US trade deficits, this means Australia is subsidising the US economy. Judging by how often this deficit is raised, there is clearly hope that this might be enough for Australia to dodge the tariff bat. Others have pointed to the $3 billion already sent to the United States as an instalment on nuclear submarines. Then there are the US military bases that Australia hosts.
Is this enough to avoid being targeted?
Some of Australia’s exports to the United States do compete with US producers. Aluminium (fourth-biggest merchandise export to the United States) and steel exports were caught in the Trump 1.0 tariff round aimed at protecting US smelters, although then prime minister Malcolm Turnbull managed to negotiate an exception. Whether US producers of sheep and goat meat (Australia’s number one merchandise export to the United States in 2023) are clamouring for protection is yet to be seen. Gold (our second-biggest merchandise export) is an unlikely target because of its importance to financial markets.
One of the few bipartisan positions from the major political parties in Australia is that raising tariffs in retaliation is a bad idea.
But there are a wide range of products in the pharmaceutical, optical and medical device categories that could be targeted. None are big money from an Australian export perspective, but the United States will be an important market for the producers of these products. To the extent these products are specialised, it will take time for US producers to develop substitutes. The danger for Australia is that US tariffs would increase the incentives for these innovative firms to shift production. Keeping these firms in Australia could require substantial public subsidies – a game that these firms are already adept at playing.
While Australia imports more from the United States, retaliation would hurt us far more than it would US exporters. Australia did not retaliate when China imposed trade sanctions on our exports of coal, wine, barley, beef, timber, cotton and lobster in 2020. Our economy proved itself to be remarkably resilient and these sanctions have all been lifted, with the last to go being on lobsters in late 2024. One of the few bipartisan positions from the major political parties in Australia is that raising tariffs in retaliation is a bad idea.
Even with no risk of retaliation, from an economic perspective Australia should be a small target for country-level tariffs. There would be little tariff revenue, little benefit for current US producers, and potentially some consumer pain from higher prices for specialised products.
But Trump’s tariffs are not just (or even) about economics. They are about coercion. The purpose of China’s sanctions was never clear, more a warning shot to other countries to not offend China’s sensibilities. Trump is likely to be much more explicit in what he wants.
So what is Australia doing that US interests might be unhappy about? The social media ban for under 16-year-olds comes immediately to mind. To what extent will the Australian government allow social or other policy to be dictated by US business interests? There may well be advocates in Australia for such policy changes, but to comply with US demands would undermine Australian sovereignty. Is ceding sovereignty to avoid a small loss from a tariff a cost Australians would be willing to pay?
US tariffs on Australian exports will not have much of an impact on the Australian economy because our exports to the United States are so small. Far more concerning is the effect that US tariffs will have on the global economy. China has already hit back on the 10% rise with increases of its own. The EU has indicated that it too would retaliate. Australia has much to lose from a trade war. We also have a lot to lose if more countries decide that they can ignore the rules they agreed to in joining the World Trade Organisation and when they ratified the bilateral and plurilateral trade and investment agreements they had negotiated.
As a signatory to both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, Australia is well placed to encourage members of these agreements to cooperate to resist US coercion and avoid special deals that are costly to others. An isolationist United States is bad for global growth. But a widespread race to protection and beggar-thy-neighbour policies would be even worse.
