What is the impact of Trump tariffs?

From Challenger Chief Economist Dr Jonathan Kearns

This week, President Trump announced 25% tariffs on imports of steel and aluminium. There has been extensive coverage in Australia, despite Australia being a minor player in this game. In addition to hurting US consumers and manufacturers and builders using steel and aluminium, these tariffs will damage the economies of several allies, particularly Canada.

Australia’s annual exports of steel and aluminium to the United States amount to just US$650 million. Australia accounts for only 1.2% of US’ steel imports and 1% of aluminium imports. But the tariffs will hit Canada hard. Canada exports US$19 billion of steel and aluminium to the US, accounting for 24% of US steel imports and 41% of aluminium imports.

In almost all cases, tariffs are bad not only for trading partners but also for the domestic economy. The tariffs will push up US prices, and potentially reduce the availability, of steel and aluminium in the US. This will increase final prices in construction and manufacturing, such as cars and appliances, for US consumers and US exporters.

Proponents of tariffs claim that foreign producers will absorb the cost of tariffs and that domestic production will be stimulated given reduced imports. These two claims are inconsistent. The 2018 tariffs imposed by the US on some steel and aluminium products, despite some exemptions, increased prices in the US. While the US, as a large economy, has a better ability to force foreign producers to partially absorb tariffs, even it was not able to force them to fully absorb the cost of tariffs. As a result, US domestic prices increased leading to an increase of US production of steel and aluminium.

Currently, there is significant spare capacity in the US in steel production, and metal ore mining sectors. However, this productive capacity is dormant because it has higher costs. US domestic production will only increase if tariffs increase US steel and aluminium prices.

The steel and aluminium tariffs are not as damaging for Australia as some reports suggest. Steel and aluminium account for just 3% and less than 1% of our exports to the US. While of course there can be meaningful impacts for individual producers, for the economy as a whole these exports are rounding errors.

Australia is not overly sensitive to direct US tariffs. Only 5% of Australian exports go to the US. Australia has an annual trade deficit with the US of $32 billion which makes us less of a direct target for Trump tariffs. But we can obviously be hurt by tariffs on specific goods that we export in large quantities to the US.

Australia is also not overly sensitive to US tariffs on specific goods as we export a wide range of goods to the US. The category that would be most impacted by tariffs is beef and other meat, which together account for 18% of Australian exports to the US.?

There have been mixed messages on whether Australia might get an exemption from these tariffs. Recent comments from the US administration suggest no exemption will be forthcoming as, misleadingly, Australia is ‘killing the aluminium market’ (but see above, we are just 1% of US imports). Earlier, however, the President seemed more open to an exemption, noting the US has a trade surplus with Australia as we are ‘far away’ and so ‘buy a lot of airplanes’. On this, the President was close to the mark. Australia’s third largest category of US imports is airplanes. More generally, most of our US imports are high-end manufactured goods that are not easily substituted, making retaliation by Australia difficult.

Retaliation would be costly for the Australian economy. Other than playing to a domestic political audience or appearing tough to discourage future tariffs (which is difficult as a small economy), the best response to tariffs is doing nothing.