Trump tariffs – what’s going on and what does it mean for Australia?

Posted by Gavin Chau

My WhatsApp groups have been on fire recently regarding the effect of Trump’s tariffs. The share and crypto markets were nuking in real time as he read out the tariffs in each country. Markets hate uncertainty, but what does it all mean?

The short answer is nobody knows—presumably other than Donald Trump and his team. But here are the seven possibilities, as far as I can tell.

They’re a way for the US to raise tax revenue to help pay down some of the ballooning deficits. On the other side of the equation, Elon Musk’s Department of Government Efficiency (DOGE) is working to cut wasteful spending—in most cases, this was simply grift and corruption anyway.
They’re designed to nuke the economy to get the Fed to cut interest rates to allow the record US debt to be rolled over at lower interest rates
As a starting point to re-negotiate better trade terms with different countries
As a bargaining chip to get soft power in smaller countries to aid the US against what they see as their largest peer competitor (China)
An attempt to bring manufacturing jobs back to America
To get the public talking about the trade deficit so the average American is forced to learn what it means
Trump doesn’t know what tariffs are or what they do

I think the last answer is the least likely. Anyone who can type ‘what are tariffs’ into any search engine or large language model (AI) can find out what they are. On top of this, there is a vast body of evidence on the use of tariffs in the past and their effect. As an aside, there isn’t any real modern evidence to suggest that the use of tariffs has had its intended effect. Closing your doors to the rest of the world because you can’t compete doesn’t stop the rest of the world from continuing to innovate and surpass you.

This leaves any (or all) of the previous six answers. It wouldn’t surprise me if all of them were true simultaneously, although the least likely to play out (as intended) is to bring manufacturing jobs back. There are already many ‘dark factories’ in China where the factory is run 24/7 with the lights off because they are completely automated and do not require humans. These factories are popping up all over the fringe cities in China, and existing factories are being upgraded with AI and robots. Tesla has also completely automated large parts of its manufacturing. If this is the future of manufacturing, in the long run, there will be no manufacturing jobs to bring back.

Manufacturing, particularly in products higher up the value chain, requires increasingly fewer manual workers and more knowledge workers. This means that a portion of the community is permanently locked out of these industries. It is a very different world from, say, 1950s Detroit, where anyone willing to work hard could get a well-paid job in an automotive factory and purchase a house to raise three kids on a single income. That time has passed.

Additionally, questions are raised as to whether the increased cost of goods manufactured in America would be cheaper than importing the same goods from overseas, even with the added cost of the tariffs.

What has also been revealed is how many otherwise smart and prominent investment and political commentators misunderstand the global economy. Christopher Joye recently said in a podcast with Mark Bouris that if BYD (the largest EV manufacturer in the world) stops selling to America, it would flood Australia with cheap vehicles, bringing prices down. The truth is that BYD has never sold any passenger vehicles in America. The US already had 100% tariffs on them under the Biden administration. China also won’t be able to flood the Australian market with cars since they’re already here. Australia, with around 7.5% of the population, would never be able to replace the US market in a parallel reality where BYD was sold in America in the first place.

At present, it appears that most countries have already come to the negotiating table, so points three and four already appear to be in play. It seems likely that a 10% US tariff will remain across the board, but it will take time to see how the results play out. If negotiating terms improve for the US, then this will indeed lead to higher exports from the US, which is healthy for their economy.

The only major economy that hasn’t come to the negotiating table is, of course, China. It has threatened reciprocal tariffs of 34% and trade restrictions on key items. It likely has more cards to play than most other countries since it holds 90% of the global supply of rare earth metals, which are crucial for the US defense industry and chip manufacturing. It also controls a significant amount of the Active Pharmaceutical Ingredients (API) market – the active ingredients for medicines. Around 40% of APIs exported originate from China. This includes 80% of antibiotic API’s and 70% of paracetamol. Furthermore, India, which is also a major global producer, sources 70% of its APIs from China. There are also many products that cannot be produced at scale or at reasonable prices outside of China.

How this plays out is anyone’s guess, but the interconnectedness of supply chains likely means that the US and China will continue to trade with each other via intermediaries in the short to medium term—even as trade tensions rise.

What does it mean for Australia?

We are one of the few countries with which the US has a trade surplus, meaning that we buy more from the US than we sell to them. This is largely because we purchase things like US-based software and other digital products such as Disney and Netflix. In contrast, we mostly sell commodities such as wheat, wool, meat, and iron ore, which the US doesn’t really need.

Of course, China is our largest export market, making up about 35% of our export volume. We also have a large trade surplus with China since they purchase more from us than we do from them. If the trade war slows the Chinese economy, we should see our economy slow down, too. Already, Deutsche Bank has forecasted a 0.5% rate cut by the RBA in May, followed by another 0.5% cut in the second half of the year (25bps in August and November). This would reduce interest rates by 1% by year-end. Money markets have priced in a 100% chance of a 0.25% cut next meeting and a 25% chance of a 0.5% cut.

Steven Miller (former advisor to Paul Keating) sees an even more dire situation with the economy and is forecasting five further 0.25% rate cuts by the end of the year, bringing interest rates 1.25% lower than where they are currently. As I have mentioned in previous blogs, trade wars tend to drag economic growth down, and the effect is they will either hasten or deepen interest rate cuts. For the time being, things look to be right on track. As always, these conditions are the same as the ones that have preceded all other property booms in the past, and I don’t see how this time plays out any differently.

Posted by Gavin Chau, on 8th Apr 2025