Looming US trade war to disrupt Australian economy, expert warns

Last week, US president Donald Trump imposed 10 per cent import tariffs on China and threatened Canada and Mexico with 25 per cent tariffs. The latter have been paused temporarily as the countries scramble to find diplomatic solutions.

If the tariffs go ahead, they are set to heavily impact the highly-integrated North American economy, with global implications.

“If you make the US less productive the world's become less productive. So it just means that a lot of the things we buy are going to get more expensive.” UNSW economics lecturer Scott French told Accounting Times, regarding the proposed tariffs.

The USA, Canada and Mexico comprise almost a third of global GDP. If the proposed tariffs are implemented, any product that has passed through North America “at any point of its value chain” will be affected, French explained.

“The level of integration there is huge. If you disrupt that, it's going to cause the need to completely re-think how these companies structure their supply chains,” French said regarding trade between Canada, Mexico and the US.

“A lot of the things that Australia imports are going to get more expensive as a result,” he added.

Australian companies operating in North America would also take a direct hit from the proposed tariffs. According to DFAT, at the end of 2023, Australian investment in Canada was valued at $109 billion.

Even if the Canada-Mexico tariffs are scrapped, Australia’s economy will likely see flow-on effects stemming from a weaker Chinese economy, trade diversion, a weakening Australian dollar and global supply chain disruption, according to French.

“Australian companies with operations in Canada or Mexico such as Rio Tinto, whose Canadian operations export billions of dollars of aluminium to the US, have won a temporary reprieve.” Scott French wrote for The Conversation, regarding the pause of tariffs on Canada.

“But the risk of weaker economic growth in China will weigh heavily on companies that export to our largest trading partner.”

A trade war between China and the US would weigh on China’s GDP due to their significant trade relations. According to data from the Observatory of Economic Complexity, the US was China’s top export destination in 2022. China exported $551 billion worth of products to the US, 14.8 per cent of China’s total exports that year.

China also buys an outsized share of Australia’s exports, making up 32.5 per cent of our total global exports in 2023, according to DFAT.

“A negative shock to Chinese exports would weigh on commodity demand,” the RBA warned in a release regarding the threat of escalating US tariffs on China.

China has already responded to US tariffs by imposing their own 15 per cent tariffs on US coal and LNG imports, and 10 per cent levies on oil, farm equipment and automobiles from the US, according to reporting by Al Jazeera.

Trump has described the 10 per cent blanket tariff on China as the “opening salvo,” and threatened that they could become “very, very substantial” if an agreement isn’t met between the US and China, according to reporting by the BBC.

Trump paused tariffs on Mexico and Canada following phone calls with their respective leaders, who promised to fulfill stronger border security commitments. Time will tell if they will be lifted, or whether North American supply chains will be caught in an escalating trade war set to rock the global economy.

However, according to Scott French, Trump’s threats will shape trade in North America regardless of whether he sticks to them or not.

“Even if the tariffs never materialize, any business that is thinking of setting up production somewhere in North America is going to consider now the risk of crossing the border,” French explained.

“You've just essentially reduced the productivity of one of the largest economies in the world, and that's going to have ramifications everywhere.”