Can Australia dodge the trade war?

Rapid and significant shifts in US trade policies, and retaliatory measures from other nations, are causing significant changes and considerable uncertainty in global trade.

As a trading nation, Australia is clearly at risk of being affected, perhaps heavily. Exports plus imports account for about half of Australia’s GDP, and much of the country’s economic success in recent decades has been driven by a 750 per cent rise in the value of its resource exports.

Policymakers and business leaders need to be nimble, not only to deal with the challenges but also to seek out opportunities. That said, we see five reasons why Australia could fare better than most.

First, Australia has low direct exposure to the US from a trade perspective. So far, the biggest move that directly affects Australia is a 25 per cent increase in US import tariffs for steel and aluminium. Unlike in the first Trump presidency, Australia has not been exempted from these tariffs. However, these are small from a macroeconomic perspective, accounting for just 0.2 per cent of Australia’s exports.

More US trade policy changes are expected on April 2, when the US administration releases its next wave of proposed policy changes. Even then, keep in mind that Australia’s direct exposure to the US is relatively limited, with the US taking only 4.6 per cent of Australia’s total exports. The bigger risk for Australia is the indirect effect through the impact on our major trading partners, mostly in Asia, particularly China.

Second, on April 2, the US is expected to announce reciprocal tariffs. Here, Australia should also fare better than most because the US average import tariff on Australia’s exports is higher than the rate Australia applies to imports from the US. There are some suggestions that value-added taxes will be included, but even here, Australia has a comparatively low goods and services tax rate.

Third, and more critically, being a large commodity exporter may help, rather than hinder, Australia’s position.

Some observers argue that a key challenge for Australia could be that its exports are highly concentrated in iron ore, coal and gas, and have a high degree of geographical concentration (China accounts for a large share of Australia’s trade).

But this risk is offset by the fact that commodities are easier to substitute across markets than many other types of exports. That is, if one country lifts trade barriers, commodity exports can typically be diverted to other markets, and much more so than many other upstream inputs into manufactured goods.

Diverting exports is much more complicated when a country produces very specific inputs for a particular production process, or where the whole process spans borders, as in, for example, Canada’s automotive industry.

Recent history shows what can happen when trade tensions rise and how having easily divertible commodity exports can help.

From 2020 to 2022, China imposed trade restrictions on a range of Australia’s exports, including barley, coal, wine and lobsters. Although this was disruptive for many businesses, the macroeconomic effects were limited. This was largely because of redirection to other markets. Barley exports were redirected to India, and more coal exports went to Japan and Korea. It was more difficult to divert wine exports, but even these found their way to other markets, such as the US.

Aggregate exports did not fall during this period, GDP growth did not noticeably slow, and there was little measurable effect on the Australian dollar.

Fourth, Australia’s floating currency is an ultimate shock absorber in the face of trade shocks. Even if Australia diverts its exports to other markets in the face of rising trade barriers in a particular market, this does not protect the economy against overall weakness in global growth. But in this case, the floating currency should help a great deal, as it has done in the past.

Finally, rising global trade tensions may drive a decrease in imported prices, lowering overall inflation and allowing the RBA to cut rates more, supporting local growth. One mechanism would be slowing global growth, which is typically disinflationary. Another is that raising trade barriers for China’s manufactured exports, particularly to the US, could drive Chinese producers to look for other markets to sell their wares.

Australia could well see a large boost in Chinese exports of electric vehicles, TVs, laptops and many other manufactured goods heading our way with lower prices. Unlike other countries that may compete in the production of these goods, Australian policymakers should have little incentive to lift its trade barriers to these imports. Instead, we would benefit from lower inflation.

There are likely to be few winners from the sharp rise in trade tensions, particularly in the short run, but for the reasons listed above, Australia is not likely to be the biggest loser.