President Donald Trump of the United States has temporarily halted the imposition of a 25% tariff on imports from Canada and Mexico while maintaining a 10% tariff on goods imported from China, marking a significant turn in global trade diplomacy. This decision has provided temporary relief to Australian companies operating in Canada and Mexico, such as Rio Tinto, which exports substantial quantities of aluminium to the United States. However, the broader consequences of trade tensions, particularly those involving China, remain a cause for concern.
The Impact on Australia’s Largest Trading Partner
China remains Australia’s most significant trading partner, accounting for approximately 40% of its exports, as per data from UN Comtrade for 2023. A considerable portion of these exports consists of iron ore and other essential minerals used in China’s construction and manufacturing industries. The imposition of US tariffs may further weaken China’s already slowing economy, subsequently reducing its demand for Australian commodities.
A decline in China’s demand for iron ore could severely affect Australia’s mining sector, potentially leading to a depreciation of the Australian dollar. A weaker currency would make imports more expensive, thereby increasing inflationary pressures within Australia. However, the precise impact of the latest tariffs remains uncertain, given that China has previously absorbed similar measures from the first Trump administration. The most recent tariffs are notably lower than the 60% rate he had previously suggested.
Trade Diversion and Its Consequences
One potential advantage of US tariffs on other nations is the phenomenon known as trade diversion. Higher tariffs on goods from competing countries can make Australian exports more attractive to the US market. For instance, tariffs imposed on Canadian aluminium may have increased demand for aluminium from Australia.
However, the trade diversion effect is likely to be minimal in the case of tariffs on China, as Australia and China export distinct categories of products to the US. Meanwhile, China’s retaliatory tariffs could present new opportunities. During Trump’s first term, China imposed tariffs on American wheat and agricultural products, which created an opening for Australian exporters. A similar response this time could once again benefit Australian farmers.
Despite these potential advantages, challenges remain. US exports displaced from the Chinese market could compete with Australian goods in other global markets. While Australian wheat may gain an edge in China, US wheat could displace Australian produce in countries such as the Philippines, leading to further market disruptions.
The Implications of a Weaker Australian Dollar
The introduction of tariffs generally strengthens the currency of the nation imposing them, as they reduce the demand for foreign-denominated goods. Conversely, this results in a weaker Australian dollar, which recently fell to a five-year low following the announcement of Trump’s proposed tariffs. Since November, the currency has depreciated by nearly 10%.
A weaker Australian dollar increases the cost of imports, which in turn fuels inflationary pressures. Rising inflation could have broader economic consequences, particularly if it prompts interest rate hikes, placing further strain on Australian households and businesses.
Supply Chain Disruptions and Economic Uncertainty
Should the US proceed with imposing tariffs on Canada and Mexico in the coming 30 days, the most significant consequence would likely be supply chain disruptions. Historically, analyses of previous US tariffs, such as those imposed on China in 2018, indicated that American businesses bore most of the cost due to their reliance on imported components. Given the deep integration of North American production networks, tariffs on Canada and Mexico could create substantial disruptions for manufacturers across the region.
Experts such as economic networks specialist Ben Golub warn that tariffs could disrupt key production processes, potentially leading to the failure of intermediate suppliers. Disruptions that force smaller but essential suppliers out of business could have cascading effects on major industries.
For Australia, these disruptions could manifest as increased prices and delays for imported goods, not only from the US but also from any supply chain that relies on North American inputs. The lingering effects of supply chain disruptions caused by the COVID-19 pandemic, which contributed to inflationary spikes in 2021 and 2022, serve as a stark reminder of how global trade instability can have far-reaching consequences.
Looking Ahead
While Australia may avoid direct involvement in an escalating trade war, it cannot escape the broader economic consequences. Even if Trump’s proposed tariffs do not materialize, uncertainty surrounding trade policy can disrupt investment and supply chains.
