Trade & investment, explained.
The Coalition has promised price relief at the bowser (John Harvey/Flickr CC BY-NC-SA 2.0)
Big budget deficits thanks to election promises leave little room to move ahead of a gathering tariff war.
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Sweet deals, sour times, and Australia’s blind eye to TrumponomicsSweet deals, sour times, and Australia’s blind eye to Trumponomics
Treasurer Jim Chalmers’ budget and Opposition leader Peter Dutton’s budget response were both heavy on spending promises, aiming to ease the cost of rent, housing, groceries, electricity, and insurance. And that’s understandable – with an election campaign now underway, both of the major political parties in Australia are dishing out sweeteners in what’s shaping up to be a razor-thin contest.
Notably, Labor’s proposal to top up income tax cuts won’t kick in until mid-next year, but will cost the government $17 billion over the coming years. Meanwhile, the Coalition’s fuel excise cut may lead to an estimated $6 billion in lost tax revenue in just one year. Such measures could delay interest rate cuts or – given the tendency for tax cuts to fuel spending – further inflation.
That means, without fundamental structural reforms to the tax base or to spending, both sides are staring down a prolonged era of deficits. With more spending, more debt, and less fiscal room for future crises, it leaves the impression of an Australia unprepared for the economic storm brewing across the Pacific.
With a global trade war looming, Labor’s recent budget proposal underplays the risks posed by America’s isolationist economic policies under Donald Trump. While the budget papers don’t mention Trump by name, Chalmers acknowledged in his speech to parliament last week that “the 2020s have already seen a global pandemic, global inflation, and the threat of a global trade war,” and that tariffs could discourage investment and dampen consumer confidence.
Although alluded to in a roundabout way, many of the budget’s underlying assumptions rest on economic conditions that could be upended by Trump’s proposed tariffs from what is being dubbed “liberation day” on 2 April. The budget lays out a picture of stability, appearing unfazed by the threat of US tariffs potentially destabilising Australian exports and reigniting inflation.
The slowdown of the Chinese economy, a major importer of Australian minerals, could further exacerbate the situation by reducing demand for Australian exports, particularly iron ore.
A tariff is a tax imposed by an importing country on foreign goods. Historically, tariffs were a key source of government revenue, but today they are increasingly used as protectionist tools to shield domestic industries from foreign competition. In theory, they hurt exporting countries, but in practice, American consumers will bear much of the cost – meaning the United States is, to some extent, shooting itself in the foot.
But Trump isn’t one for economic logic. He has the power to impose tariffs, and he will – whether it makes sense or not. The real question is to what extent is Australia prepared for or considering contingencies?
Steel and aluminium, automobiles, pharmaceuticals, and agriculture (especially beef) are all in the firing line. Australia’s argument for an exemption has been flatly rejected. Trump, who insists the United States has been “treated unfairly by trading partners, both friend and foe”, seems intent on using tariffs as leverage – whether to strong-arm allies, coerce rivals, or simply flex his power on the world stage.
This harms Australia both directly and indirectly. Chalmers has framed economic security as increasingly intertwined with national security across the past year, highlighting initiatives such as Pacific banking support, a $50.3 billion defence boost, and intelligence funding. While these measures are necessary, they fail to prepare Australia for the ripple effects of Trump’s trade policies.
This is because Australia is not alone in facing the US tariff hike. In response, retaliatory tariffs from other countries – such as China, Canada, and Mexico – are already enroute to escalating into a global trade war, further entrenching protectionism and lowering global productivity.
While Australia’s direct exports of steel and aluminium to the United States, for example, are limited, the broader concern lies in the economic fallout from such a trade conflict, which could negatively impact Australia's economy. Additionally, the slowdown of the Chinese economy, a major importer of Australian minerals, could further exacerbate the situation by reducing demand for Australian exports, particularly iron ore.
Australia cannot afford reactionary protectionist policies. This is because reciprocal tariffs would raise the price of imports, which then drives up the cost of goods and services that rely on them. Domestic producers of substitutes would also increase prices, creating a price shock. With cost-of-living concerns already high, retaliation is not an option. And with both major parties’ budget plans setting the country on a path to a deficit, the pain could not be absorbed regardless.
The smart response, some argue, lies in working with other countries to foster global growth. As the saying goes, the best way to stand up to a bully is not to face them alone. Australia should focus on facilitating market adjustments in response to a more isolationist America, seeking mutually beneficial trade opportunities that leverage previously US-bound products. Recognising opportunities for trade diversification in the Indo-Pacific region and collaborating with the World Trade Organisation would help manage the global trade transition.
Whichever way, Australia needs a more proactive approach as Trumponomics is set to flutter our budget plans. Because it’s not just the voters at home, but also potential trading partners looking up to Australia.
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