Government urged to avoid protectionist response to Trump's tariffs

The message from experts in international trade and economists is that the Australian government should refrain from retaliating with reciprocal tariffs. 

On Wednesday, Australia woke up to the news that US President Donald Trump had rejected its bid for an exemption from the 25 percent tariff on aluminium and steel imports, which took effect that afternoon.

Speaking to the media that morning, Prime Minister Anthony Albanese – who last month spoke with the newly elected President about this very issue – called the decision “disappointing”.

“Australia has a close relationship with the United States. Friends need to act in a way that reinforces, to our respective populations, the fact that we are friends. This is not a friendly act,” Albanese said.

The underlying message, however, was that the tariff applied universally. “That is important,” Albanese said.

“In terms of the competition aspect, every country’s exports on aluminium and steel into the United States will have the same tariff.”

Dr Vladimir Tyazhelnikov, senior lecturer at the University of Sydney, shared a similar sentiment, telling the media that “Australian steel and aluminium will not be at a disadvantage compared to exports from other countries”.

Acknowledging that these tariffs may drive down international steel and aluminium prices, negatively impacting Australian exporters, Tyazhelnikov said the biggest risk for Australia is a potential global trade war, which could disrupt supply chains and weaken manufacturing across east and south-east Asia.

“Since Asia is a key market for Australian steel and aluminium, such disruptions could have significant economic consequences for Australia,” he said.

Dr Scott French, a senior lecturer in the school of economics at UNSW Business School, urged policymakers to “carefully consider their response”, warning that reactionary protectionist policies could have long-term consequences for Australia’s economy.

While about 15 per cent of Australian aluminium and steel exports go to the US, like Tyazhelnikov, he warned broader effects of the tariffs on the global market could prove to be more consequential for Australian producers overall.

“In terms of exports, aluminium and steel are only a fraction of the size of Australian mining sector,” Dr French said.

“So, if you’re looking at Australia as a whole, the direct effect on miners is smaller. But it’s a bigger overall sector, so when you multiply that out, it’s probably the bigger of the two impacts for Australia overall.”

Turning to reciprocal tariffs implemented by the likes of China, Canada, Mexico and the European Union on Wednesday, Dr French said policymakers should avoid the temptation to protect Australian manufacturers from foreign competition.

“Maintaining competitiveness is important because the one thing I’ve seen coming out of the industry is they’re worried about foreign products flooding the Australian market and displacing the domestic manufacturing here,” he said.

“I can already feel the push for protective tariffs to keep out foreign products competing with domestic production. I’m very, very wary of something like that because I find that Australia has done well by having very low trade barriers. And we don’t want to go back to the experience from earlier decades where local manufacturing was very highly protected and very uncompetitive.

“So that’s why I think maintaining competitiveness is important, and I would strongly caution against trying to enact any sort of protective tariffs to isolate the domestic market for these products.”

Government should 'protest vigorously'

Last month, speaking to Super Review's sister brand InvestorDaily, AMP’s Shane Oliver said the overall macro impact of Trump’s steel and aluminium tariffs on Australia would be minimal.

“Even if Australia is not exempted, while it would be horrible for the affected industries, the overall macro impact on Australia would be trivial,” he said, adding that steel and aluminium exports to the US total some $800 million or just 0.03 per cent of Australian gross domestic product (GDP).

“Overall total Australian exports to the US are less than 1 per cent of total US goods imports and just 0.8 per cent of Australian GDP,” he said.

Speaking to Super Review's sister brand InvestorDaily on Wednesday, Oliver joined the chorus urging the Australian government not to retaliate with reciprocal tariffs, warning that such actions could have long-term negative effects on the economy. Instead, he suggested allowing the Australian dollar to dip and act as a shock absorber, mitigating some of the impacts.

"It [the government] should protest vigorously, but it should certainly not react by putting tariffs on American products. That would just spread the pain," the chief economist said.

"It's not good that your best friend globally or a country we thought of as our best friend is suddenly doing this to us. And it's not good for the national psyche. But to respond by putting tariffs on American products will just make the pain even worse".

Ultimately, he noted, Australia was "going to get hit anyway", adding that the bigger issue at play is "what happens going forward".

One of the government’s key arguments for seeking an exemption from the tariff regime is that Australia typically runs a trade deficit with the US. However, in January, Australia posted a trade surplus of US$2.2 billion, driven largely by a surge in gold exports to the US.

According to the US Census Bureau, the US exported US$2.4 billion worth of goods to Australia while importing US$4.6 billion, resulting in a trade deficit of just under US$2.2 billion.

Touching on this, Oliver said "that's not going to be sustained".

"I think it was gold being sucked back into the US to avoid any threat of tariffs on gold. He's talked about tariffs on copper and other things. So that's really what's going on there. I don't think in any way it's going to be sustained. In fact it's because of the tariffs."

To hear more from Oliver on Trump, tariffs, global trade and the state of the economy, tune in to our Relative Return Unplugged podcast from Thursday afternoon.