By MILLIE MUROI, Economics Writer
Eventually, Donald Trump will backpedal. Economists get plenty wrong, but one thing most believe – and get right – is that widespread tariffs are stupid. Why? Because they create more losers than winners.
Trump is smart enough to know this. But he’ll look to twist arms with his tariffs until some of his demands are met (seemingly at the top of his wishlist: Mexico, Canada and China curbing illegal border crossings and drug cartels). He’s betting on this happening before Americans start to notice their living standards drifting into the gutter.
For Australia, now’s the time to swing. Not at Trump, but towards the neighbours we’ve neglected. To its credit, the federal government isn’t playing into the president’s games: as Treasurer Jim Chalmers said this week, the tariffs on Australian steel and aluminium are disappointing, but our response will not be to raise tariffs on the US in a race to the bottom.
Why? Because taxing imports backfires. Tariffs make imports more costly for consumers as well as businesses relying on imported fuel, ingredients or goods to make or sell their products. Sure, tariffs on steel might shield steel producers in the US, but it will stop those workers and resources from flowing to more efficient areas – and at the expense of Americans needing steel to build (and buy) machinery, houses and cars.
Remember – the reason we trade is to specialise in things we’re better at doing or producing than others. For Australia, these are mostly resources we dig up and ship off. Iron ore accounted for more than one-fifth of our exports by value in 2023-24, followed by coal and natural gas, both at about one-tenth each. We can then use the money we make to buy the things we’re less good at making.
That includes cars. We produced them for decades in the 1900s, but eventually the Australian car manufacturing industry stalled and shut up shop in 2017. It was just too costly to continue pumping out cars, especially when we could ship them in and focus on the stuff we could produce better than everyone else. In 2023, cars made up 6 per cent of our imports, just behind the one-tenth spent on globetrotting and similar share spent on petrol.
Luckily for Australia, a drop in exports to the US isn’t going to hobble us. Only about 6 per cent worth of our exports were destined for the US in 2023 – far less than the one-third shipped up to China and 12 per cent sent to Japan. China’s appetite for Australian exports is mostly for commodities such as iron ore, natural gas and gold.
However, slapping tariffs on US imports to Australia would take a toll on us. While one-quarter of the value of our imports comes from China, about one-tenth flows from the US and another tenth from Japan. Responding to the US with tariffs of our own would make machinery, planes and pharmaceuticals, among other things, more expensive.
One thing that has kept Australia in Trump’s good books, at least until recently, has been the fact we have a trade deficit with the US. That is, we import more from the US than we export to them. The US, in turn, has a trade surplus with us: they export more to Australia than they import to us. But does this really matter?
Well, not really. For example, Australia had a more than $110 billion trade surplus with China and $30 billion trade deficit with the US in 2023. Neither of these things is necessarily “good” or “bad” because both importers and exporters benefit from trade.
But a big trade deficit or surplus can suggest if a country is especially reliant on another country for supplies or income – and therefore more at risk to shocks such as tariffs.
Trump’s tariffs – and threat of more to come – are a chance for Australia to branch out from its biggest trading partner.
It’s not the first time we’ve done it. In the 19th century, Australia was heavily reliant on the UK as a destination for our agricultural and mineral exports. As the UK shifted towards a more protectionist economy with high tariffs in the early 1900s, and stopped giving Australia preferential tariff treatment, we shifted towards some of the countries which are, today, among our biggest trade partners, including the US and those in northern Asia.
Whether Trump stubbornly keeps his foot on the tariff pedal or not, Australia has a good opportunity to build stronger ties with countries in South-East Asia which have expanding economies, growing middle-class populations and are geographically closer.
Many of these countries, including Vietnam, Taiwan and Thailand – which are among those most likely to be hurt by Trump’s tariffs because of the large amount they export to the US – will probably also be more open to strengthening ties with neighbours in the Asia-Pacific. It also makes sense to build stronger ties with our neighbours from a strategic geopolitical perspective as China poses a growing security threat to the region.
The government is already looking for ways to expand free-trade agreements in South-East Asia and reviewing ways we can work more closely with the region. But taking action now is crucial.
A recent visit to Vietnam opened my eyes to egg and coconut coffees (I now make one most days after decades of believing I didn’t like coffee), but the country is also a growing player in pharmaceuticals, making prescription medicines and turning into a manufacturing hub as it transitions away from a primarily agricultural economy.
Vietnam will not, for the foreseeable future, be a replacement for the US: a clear world leader in pharmaceuticals and far advanced in manufacturing. But investing in the capabilities of countries in South-East Asia, partnering with them and fostering connections with its people – including drawing on ties and expertise held by immigrants from the region who can provide insight – is important.
Like past shifts, pivoting away from old friends won’t be a quick process. It will take time, investment and some pain to focus on strengthening trade and ties with new countries, many of which are facing their own challenges and growing pains.
We’ve got the right idea when it comes to exercising restraint on tariffs of our own. But whether Trump backs down soon or not, Australia needs to play a longer game when it comes to trade.
