Trump's tariffs: What are the effects on the Aussie market?

Following Trump's election, with his promise to impose at least a 10% tariff on all imports into the United States, it is likely that there will be no exemptions during his second term for tariffs on Australia. All of Australia's major exports to the U.S. will be affected.

Australia's largest export market is China, accounting for 32% of total exports, while the U.S. market accounts for 5%. Australia exports products such as beef, wine, and dairy to the U.S. Imposing tariffs could drive up market prices in the U.S., potentially reducing demand. Additionally, Australia exports resources like iron ore and liquefied natural gas to the U.S. Tariffs could make these resources more expensive, potentially reducing their competitiveness with other global suppliers and decreasing export volumes. Industries directly involved in exports to the U.S., such as agriculture, mining, and manufacturing, may experience a downturn, which could lead to layoffs in export-intensive regions and regional economic challenges.

China is Australia's largest trading partner, and the U.S.'s imposition of tariffs on China could negatively impact Australia's economy. Iron ore and coal account for over half of Australia's global export earnings, and when other minerals are included, this proportion rises to more than 70%. If U.S. tariffs lead to a slowdown in China's economy, it could reduce the demand for Australian iron ore, coal, and other minerals that are crucial to China's manufacturing and construction industries.

Reserve Bank of Australia Governor Michelle Bullock has noted that potential trade tariff measures by Trump against China could be detrimental to Australia, given that China is its largest trading partner. Such tense trade relations could lead to an expansion in the intensity and breadth of global trade frictions, adversely affecting Australia's economy.

Trump's tariff policies could lead to fluctuations in the Australian stock market. Elliot Clark, a senior economist at Westpac Bank, stated:

Looking back at Trump's previous term, on March 22, 2018, Trump announced a large-scale imposition of 25% tariffs on about $60 billion worth of Chinese imports, which had a certain short-term impact on the Australian market. The ASX 200 fell by 1.96% the next day, but the index still rose by 10% over the following two months, ending the year down by 4.76%. From 2019 to early 2020, the ASX 200 overall increased by nearly 20%.

Trump's increase in tariffs will lead to a reduction in Australian exports, potentially slowing down Australia's GDP growth, as exports contribute significantly to the economy. Goldman Sachs currently forecasts Australia's GDP to grow by 1.8% next year, down from a previous prediction of 2%. The increase in tariffs could bring "negative spillover effects" to Australia.

A weakening in export demand could lead to slower economic growth and potentially higher unemployment in export-dependent sectors, putting downward pressure on policy interest rate expectations. This might prompt the Reserve Bank of Australia to consider cutting interest rates earlier. Australia's current interest rate level is 4.35%, which has remained unchanged since November 2023. Goldman Sachs has a more optimistic forecast, predicting that the central bank will cut interest rates at its first meeting next year and reduce the rates to 3.25% by November.