The impacts of trade policy shifts

Increase in Tariffs: A Threat or Mixed Outcome for Australia?

On 26 November, president-elect Donald Trump’s announced his intention to impose tariffs of 25% on imports from Canada and Mexico, and a 10% on imports from China, with stated aim is to combat issues of migration and the flow of fentanyl into the USA. Understandably, the broader economic implications of such policies have drawn criticism and raised concern worldwide, with even the Commonwealth Treasury weighing in, highlighting potential risks to the Australian economy.

The natural question arises: Should Australia be worried? To explore this, we turned to the QGEM CGE model to simulate potential outcomes and gain insights into how these tariffs could impact Australia’s economic landscape.

Key Economic Findings:

1. Challenges for the Targeted Countries: The tariffs are - as expected - projected to exert considerable pressure on the economies of China, Canada, and Mexico. All three have deep trade ties with the USA, and we find the potential for a first year GDP decline in Mexico and Canada of 2.3% and 0.6% respectively. China, facing the smaller of the proposed tariff increases, fares comparatively better at a decline of 0.1%. The impacts of loss of competitiveness in the USA market doesn't stop there, with projected job losses of nearly one million persons in Mexico alone, and a further one million between Canada and China together.

2. Economic Headwinds for the USA: While the tariffs are designed to protect USA interests, they come with a cost. Higher import prices erode purchasing power for American consumers and businesses, slowing overall economic activity in the USA. The consequence of the proposed protectionism in the USA is a GDP decline of 0.2%, and 160 thousand jobs lost.

   • Part of the announced intentions of the tariffs is to combat the trade of illicit opioids into the USA. So, from a pure economic perspective, an interesting question is what policy levers are needed to offset the impacts of the tariffs? It's a complex question, but our initial assessment is that you need an increase in the United States labour supply of approximately one million workers, or under 0.4% of total labour supply - and these numbers are comparable to estimates in the empirical literature of the likely potential increase in US labour supply if illicit drug use is lowered among the current drug users aged 18 and over. For example, Alan Krugman finds that the increase in opioid prescriptions from 1999 to 2015 could account for about 43 percent of the observed decline in men’s labor force participation during that same period.

   A Surprising Mixed Outcome for Australia: Far from being adversely affected, Australia stands to gain - slightly - under these scenarios, with a projected increase in GDP of 0.06%, and an additional 6 thousand jobs. Here’s why:

   • Improved Competitiveness: As the price of goods from China, Canada, and Mexico rises in the USA, Australian exports become relatively more attractive. This boosts our trade flows to the USA, particularly in sectors like agriculture and resources, where we already hold a strong position.

   • Access to Cheaper Imports: The tariffs create a surplus of goods in the targeted countries, particularly China, which lowers their prices. Australian consumers and businesses benefit from this dynamic, accessing cost-effective inputs and products.

3. Limited Domestic Disruption: Despite global economic uncertainty, the Australian economy shows resilience due to its diversified trade relationships and robust policy frameworks.

   
   

The results suggest that Australia is better positioned than many to weather the fallout from Trump’s tariffs, as long as Australia remains excluded from the measures, as we did under the proclamations made under Trumps first presidency. In fact, certain sectors could see opportunities emerge as global trade patterns adjust. In summary – the favourable effects of relative price changes are somewhat outweighing the negative income effects of protectionist policy impacts of USA tariffs.

That said, there are still risks. Over-reliance on favourable price shifts or assuming they’ll persist indefinitely could lead to complacency. Australian businesses and policymakers need to stay proactive, capitalizing on the opportunities while preparing for potential volatility.

Final Thoughts:

Global trade dynamics are entering a new chapter with Trump’s proposed tariffs. For many countries, these changes spell trouble. For Australia, however, the story is different. With improved trade opportunities in the USA and access to cheaper imports from China, we may find ourselves in a relatively advantageous position—if we can navigate the complexities effectively.

While the modelling suggests that Australia could benefit from the announced tariff increases on China, Canada, and Mexico, significant uncertainty surrounds the policy's final implementation. If Australia is excluded from these measures, the relative competitiveness of Australian exports in the USA market improves, and cheaper imports from the targeted countries bolster domestic affordability—resulting in a positive outcome for Australia, even as global economic conditions deteriorate. However, if Australia's exports become subject to similar tariff increases, the scenario shifts dramatically. Increased barriers to the USA market and potential retaliation from other trade partners could negatively impact Australian exporters, disrupt supply chains, and undermine the economic gains initially predicted. This policy uncertainty highlights the need for cautious optimism and proactive engagement to safeguard Australia's interests.

Interested in more detailed and in-depth quantitative analysis with specific industry sector coverage? Feel free to reach out and continue the discussion.