Retaliatory tariffs by Australia would hurt Aussie businesses, Treasury warns

Treasury has warned the government against increasing tariffs and trade restrictions in response to escalating trade tensions in global markets, as this would further compound economic costs to Australian consumers and businesses.

In an address to the economics legislation committee this week, Dr Steven Kennedy, secretary to the Treasury, noted that tariffs, trade restrictions and subsidies had become more widespread in recent years.

“According to the IMF, restrictions on investment and the trade of goods and services have grown sixfold over the past 15 years,” Kennedy said.

The trade tensions between China and the US had already placed some pressure on the Australian dollar, given Australia’s trade exposure to China, according to Treasury.

“The prospect of US tariffs on Chinese exports have exacerbated existing concerns about how weak Chinese domestic demand, and the ongoing property downturn in China, could flow through to already weak Chinese demand for Australian exports,” Kennedy said.

However, he warned against responding to tariffs or trade restrictions with similar measures as this would only lead to worse outcomes for Australia.

For a medium-sized economy such as Australia, Kennedy said there is overwhelming evidence that trade restrictions imposed costs on Australia’s consumers and businesses.

“Tariffs directly increase the prices businesses and consumers pay for imported goods. Many of these goods are used as inputs into the production of other goods and services.”

“Ultimately, tariffs can push up a broader set of prices across the economy and reduce economic growth. If Australia were to impose tariffs, we would bear nearly all the cost given our size and inability to affect the world prices of the goods we import.”

He also said cutting tariffs provided substantial benefits to the Australian economy.

“Firms in sectors that are more trade exposed are typically the most productive in an economy because these firms face more intense competition, so they need to keep finding ways to remain competitive by innovating and finding productivity improvements.”

Firms that are protected by tariffs, on the other hand, have less incentive to compete, which reduces their need to drive productivity improvements, he explained.

“Even small tariffs create inefficiencies and costs for businesses and ultimately higher prices for consumers.”

“In this light, the government’s 2024–25 Budget reforms to abolish around 500 nuisance tariffs will lower costs and contribute to productivity.”

If trade tensions continue to escalate worldwide, Kennedy added, Australia’s response must be “responsible, rigorous and effective, even if tariffs are applied to our exports”.

“It will seem counterintuitive to many, but responding to tariffs or trade restrictions with similar measures will only make matters worse,” he said.

“Australia has already shown how to respond successfully to trade restrictions. We took a well-calibrated approach when China imposed restrictions on Australian exports of barley, coal, wine, and lobster, among other goods.

“Producers in the targeted industries were adversely affected, but governments did not compound the economic cost by implementing retaliatory tariffs or barriers that would have harmed Australian consumers and businesses.”

In many cases, exporters found alternative markets.

“In the case of barley, by 2022, Australia accounted for 95 per cent of Mexico’s imports of barley. We also increased our exports of barley with other parts of Latin America, and coal exports with Southeast Asia,” Kennedy said.

“Australia’s diplomatic engagement with China was subsequently successful in having the restrictions lifted. Trading has resumed in all markets and importantly Australia has not compromised its principles.”

Last, he stressed that part of setting Australia up for success in an increasingly uncertain global economy is ensuring it is not cut off from the rest of the world.

“There are things we can do at home to build our resilience, including implementing and maintaining policies that underpin our market‑based economy and ensuring fiscal policy is sustainable while investing appropriately in our defence and security,” he said.

“As a medium‑sized open economy, a trading nation, this will ensure we are best placed to weather any major global shocks.”