In the tariff noise, some may have missed the Trump administration threats to the integrity of the US payments system (Daniel Torok/The White House/Flickr)

The latest round of tariffs threats might be the least of our worries

Trump looks to target the integrity of payments systems.

Jenny Gordon

14 February 20254 min read

The latest tariff news coming from the Trump administration is that they will calculate all support given to a country’s domestic firms as anti-competitive subsidies and all taxes imposed on imports from the United States as tariffs. This means Australia's GST would be treated as a tariff, despite being applied to most goods and services. It would also put the Future Made in Australia (FIMA) industry policy under question, as the subsidies could be treated as a tariff equivalent. Any trade with the United States could be subject to some tariff adjustment based on domestic policy choices.

Is there any upside to tariff threats based on this accounting? It will depend on whether countries adjust their policies to avoid US tariffs. The World Trade Organisation (WTO) has for many years sought to reduce both subsidies and tariffs that distort trade and investment. But the many compromises have produced rules that allow considerable discretion, not least when justified on national security, health or government revenue lines. Could Trump’s tariff "accountants" achieve what the WTO never could – level the playing field within countries by removing special treatment for some industries or firms?

Any benefit that might come from an induced policy reform would be undermined if countries adjust their policies just in relation to the things they trade with the United States.

Developing, and increasingly developed, countries that have high tariffs to promote local industry development could be hardest hit. The wisdom of their policy choice depends on whether they will be successful in growing the industry to the point that it can compete with imports without the tariff protection or subsidy support. History tells us that many fail to meet this benchmark, and remain dependent on tariffs and/or government subsidies. If Trump’s accounting gets governments to rethink their protectionism approach, some good could come of it. But structural adjustment as protection needs to be planned carefully to reduce the economic and human cost of industries closing while others expand. The United States should understand this well given its experience of the effect of China’s increasing competitiveness on manufacturing towns. A tariff shock might induce policy reform, but magnifies the adjustment costs.

Trump’s accountants only care when a country’s firms compete with US imports, or export to the United States. While the US economy is big, 27 per cent trade (exports plus imports relative to GDP) is a relatively small share of its economy (trade makes up 49 per cent of Australia’s GDP). Any benefit that might come from an induced policy reform would be undermined if countries adjust their policies just in relation to the things they trade with the United States. Even if countries did reduce protection to avoid US tariffs, there is a more fundamental objection to this scheme.

Trump’s accountants only care when a country’s firms compete with US imports, or export to the United States (Adam Cohn/Flickr)

WTO agreements are negotiated by their members. While some, notably the United States, have had a bigger say (mostly in exempting themselves from agreed requirements to reduce protection), there is still an agreed set of rules that bound countries’ behaviour. The United States has already played spoiler in reducing to appointing replacement judges to the appellant body of the WTO. With this approach to US tariff policy, the United States violates the WTO rules, and effectively sets itself up as the rule maker, and enforcer. As with the United States withdrawing from the World Health Organisation, this tariff policy undermines the effectiveness of multilateral organisations that provide mechanisms for global cooperation.

Markets need rules to operate and institutions to enforce these rules. Trade and investment flows do not happen in a vacuum. There is a legal system for enforcing contracts, a transport system that moves goods and people, a communication system that moves data, a financial system that arranges the finances, and a payments system that moves the money from where it is to where it was agreed to go.

It is past time for governments of all hues to step up and defend the international order.

In the tariff noise, some may have missed the Trump administration threats to the integrity of the US payments system. They have instructed US banks to withdraw money that had been provided by the US government under legal approval of Congress from the accounts of some not-for-profit companies and return it to the government account. These organisations had received government payments to deliver services that the President did not like.

The United States has used the role of the US dollar and its influence through the SWIFT international payments system for many years to sanction countries and individuals for actions. Iran, North Korea and Russia have been the main targets. Most of these financial sanctions have been ineffective in achieving their aims (such as to get Russia to withdraw from Ukraine, and stop Iran building a nuclear bomb), but at least the intent had a fair amount of international support.

A US government that does not respect the integrity of its own payments system and orders private sector banks to reverse payments it does not like, and has the influence over the global payments system that it does, must be of concern to all countries.

It is past time for governments of all hues to step up and defend the international order. The United States has reneged on its leadership, and if Trump continues to defy the rules that make the US government system work, the world could be in for much more than the bumpy ride of the ever-evolving tariff threats.

About the author

Jenny Gordon

Dr Jenny Gordon is a Nonresident Fellow at the Lowy Institute and also a Honorary Professor at the Centre for Social Research and Methods at the Australian National University.

Topics

United States Trade & investment Economy Australia