Tariffs imposed by US President Donald Trump may not be a surprise, but they’ve certainly caused a shock on financial markets.
Australian share market dived at the open of trade on Monday and the fall looks set to continue on Wall Street, with US stock market futures off more than 2 per cent.
“It could be an overreaction, given that China only got hit with a 10 per cent tariff but given the record highs, it was due a pullback and now it has an excuse,” market analyst Henry Jennings said.
“Expect more volatility as the tariffs unfold.”
There’s a lot at stake — the US does $US1.6 trillion in business with China, Canada and Mexico.
Canada responded with tariffs on US$170 billion in US goods.
Mexico is still working through how it will respond, while China is preparing to take the US to the World Trade Organization to reverse the tariffs.
“Investors have started what will probably be a de-risking phase — taking money out of stocks and crypto and shifting to the safety of the US dollar and gold,” MooMoo Australia’s market strategist Jessica Amir wrote in a note.
What are the implications for Australia?
Those in or approaching retirement will be worried about their superannuation balances.
Market analysts and economist are describing this as a “risk-off” event.
This means global share markets, many of which were at or neat all-time highs and were already vulnerable to declining, are now at great risk of big falls.
However, big superannuation firms including AMP are forecasting overall equity market returns to be positive over calendar year 2025, as the market recovers in the second half.
“After the double digit returns of 2023 and 2024, global and Australian shares are expected to return a far more constrained 7 per cent in the year ahead,” AMP’s head of investment strategy Shane Oliver said in his outlook for 2025.
“Stretched valuations, the ongoing risk of recession, the risk of a global trade war and ongoing geopolitical issues will likely make for a volatile ride, with a 15 per cent plus correction somewhere along the way highly likely.
“But central banks still cutting rates with the RBA joining in, prospects for stronger growth later in the year supporting profits, and Trump’s policies ultimately supporting US shares, should still mean okay investment returns,” Dr Oliver said.
Betshares chief economist David Bassense agrees a share market correction is likely, with the tariffs having increased that likelihood.
“Global equities are facing an onslaught of challenges at present…The near-term outlook is messy to say the least and the risk of deeper correction in equity markets has escalated.”
What about the Australian dollar?
Movements in the Australian dollar could prove more problematic.
This risk-off environment is likely to see further declines in the local currency.
A depreciating Australian dollar against currencies including the euro and the US dollar hurts travellers and importers.
“The Aussie dollar is suffering renewed collateral damage from Trump’s trade war,” InTouch Capital Markets senior FX strategist Sean Callow said.
“While Australia is an unlikely target for tariffs near term, the tariffs on major economies risk hitting the brakes on global growth.
“[The Australian] dollar looks to be on track to break 61 cents, setting new lows since April 2020.”
Major accounting firm EY has serious concerns for the global economy in the wake of these tariff announcements.
A model gauging the economic impact of Trump’s tariff plan, from EY-Parthenon Chief Economist Gregory Daco, suggests it would reduce US growth by 1.5 percentage points this year, throw Canada and Mexico into recession and usher in “stagflation” in the US.
“Steep tariff increases against US. trading partners could create a stagflationary shock — a negative economic hit combined with an inflationary impulse — while also triggering financial market volatility,” Mr Daco wrote.
Will Australia be hit with Trump tariffs?
Australia has a trade deficit with the United States — which means America “wins” on trade with Australia, as it has a large trade surplus.
The Australia-United States Free Trade Agreement (AUSFTA) entered into force on 1 January 2005.
According to the Department of Foreign Affairs and Trade, over 97 per cent of Australia’s non-agricultural exports to the United States (excluding textiles and clothing) are now duty free, and three quarters of agricultural tariff lines have been eliminated, with two-way trade growing from US$32 billion to US$77 billion since it came into force.
But the economics of international trade does not seem to be first and foremost in Mr Trump’s thinking of tariffs at this stage.
Economist Justin Wolfers probably put it best with regards to whether Australia is likely to be hit directly:
“I’ve been talking to people all around the world, and there’s nothing you can do but guess with this guy.
“To try and think of this as some grand strategy, to think that the Canadians are America’s darkest enemy that we need to attack and begin a trade war with is absurd on its face, so you really just can’t tell what’s going to happen.”
Tariffs on the European Union, and a universal levy on imports into the US, were both raised during the election campaign, so this is unlikely the last salvo fired in a trade war.
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Betashares’ David Bassense said this round of tariffs is likely to have a bigger impact on US prices than during the first Trump presidency.
“As it covers more than just China, the increase in the average effective US tariff is up to 5 times larger than in 2018-19 — which was also a time of when US inflation was of less concern,” he said.
“This time around, moreover, a new concern is that Trump seems to see tariffs as a way to raise revenue to fund tax cuts — rather than a temporary negotiating tactic against trade partners.”
EY’s chief economist for Oceania Cherelle Murphy warned Australia will feel the affects of a downturn in growth not only in the US, but also in China.
“While we in Australia are not directly affected by these particular tariffs, indirectly it’s quite possible that we can be,” Ms Murphy said.
“We have a number of manufacturers in Australia which of course import materials from China and sell the finished products on to the US, so we could be taxed effectively on those.”
With the prospects of so many Australian companies, not least our major miners, linked to demand from China, any risks to the Chinese economy will be felt here at home.
What about interest rates?
These tariff developments also have the potential to put upwards pressure on interest rates.
The economic logic is that tariffs increase import prices, which are transferred to retail prices as producers seek to cover their costs — this is inflationary.
There is currently a strong probability, based on Australian money market pricing, that the Reserve Bank will lower the cash rate in February to 4.1 per cent.
If these developments, however, represent a material risk to global inflation, and hence Australian inflation through import prices, these bets may be reversed.
“There will be some very worried faces at the RBA board meeting this month,” InTouch analyst Sean Callow said.
In the US, economists are pushing out forecasts of further interest rate cuts.
“The resulting surge in US inflation from these tariffs and other futures measures is going to come even faster and be larger than we initially expected,” Capital Economics’ Paul Ashworth wrote.
“Under those circumstances, the window for the Fed to resume cutting interest rates at any point over the next 12 to 18 months just slammed shut.”
