Donald Trump has followed through on his threat since last November to impose tariffs: 25% on Canada (except energy, which is 10%) and Mexico, and 10% on China. Originally set for February 4, these tariffs were delayed by a month for Canada and Mexico, contingent on border and drug policy conditions. A deal may still be reached to reduce or avert them, but ongoing uncertainty and additional tariff threats mean market volatility will likely remain high. This note examines the implications, including for investors and Australia.

Tariffs Bigger Than in 2018…

The proposed tariffs cover 42% of U.S. imports (5% of U.S. GDP), raising average U.S. goods tariffs by 7% to about 10%, the highest since 1946—far exceeding the 2018 tariffs. Trump continues to signal further tariff increases, reviewing unfair trade practices by April 1 and discussing tariffs on the EU, semiconductors, steel, metal, oil, gas, and pharmaceuticals. If fully implemented, these tariffs could raise the average U.S. tariff to near 20%—the highest since the 1930s.

Will the Tariffs Stick?

Trump is known for using tariffs as a negotiation tool, as seen with Colombia and Mexico in 2019, where tariffs were quickly removed once demands were met. The delay with Canada and Mexico suggests a similar strategy. However, the administration also views tariffs as a way to reduce the trade deficit, encourage domestic production, and generate tax revenue. While share market declines and rising consumer costs may ultimately lead to some tariff reductions, Trump appears willing to endure economic pain in the short term. In 2018, markets fell nearly 20% before he reconsidered.

Impact on the Global Economy

If implemented, these tariffs would modestly but temporarily impact global economic activity due to supply chain disruptions and reduced export demand. Estimated effects include:

• A 0.4%–0.9% reduction in U.S. GDP this year.

• Potential recessions in Canada and Mexico.

• A 0.5% hit to China’s GDP, with possible countermeasures including stimulus policies.

The tariffs could also add 0.4%–0.8% to U.S. core inflation (excluding energy and food), potentially delaying further Federal Reserve interest rate cuts. Other affected countries, including Europe, may respond with rate cuts if economic contraction outweighs inflation concerns.

Trump’s Claim That Tariffs Won’t Raise U.S. Prices

Trump insists tariffs are "a tax on a foreign country," but this is inaccurate. A tariff increases the cost of imports, which can be absorbed by businesses, negotiated with exporters, or passed on to consumers. If a $100 imported good faces a 25% tariff, the cost rises to $125. Depending on pass-through levels, consumer prices will increase, compelling U.S. buyers to switch to domestic alternatives—often at higher prices. Overuse of tariffs could eventually eliminate imports and the tax revenue they generate.

Implications for Australia

While Australia faces limited direct effects, the indirect consequences of reduced global trade could be significant, especially if Chinese demand for raw materials declines. U.S. tariffs on Australian goods are unlikely, given Australia’s trade deficit with the U.S., but targeted products like beef, precious metals, pharmaceuticals, and wine could still be affected.

A broader trade war, particularly one impacting China, poses risks for Australia. An OECD study suggests a 1.2% GDP reduction in a worst-case scenario (10% drop in global trade). However, RBA analyses indicate a more modest impact (0%–0.2% over two years), thanks to the resilience of Australia’s mining sector.

U.S. tariffs won’t directly raise Australian inflation unless Australia retaliates with its own tariffs or the Australian dollar plunges. Given the potential drag on growth, Trump’s trade war strengthens the case for RBA rate cuts. The market already priced in a 96% probability of a February rate cut after the tariffs were announced.

Market Implications

Trump’s trade war could have mixed effects on financial markets:

• Negative for shares, especially foreign equities, but U.S. small-cap stocks may benefit.

• Uncertain for U.S. bonds, as weaker growth pressures rates down while higher inflation pressures them up.

• Positive for U.S. bonds in other countries, where economic slowdowns could drive rate cuts.

• Stronger U.S. dollar, as tariffs tend to lift the currency of the imposing country.

• Weaker Australian dollar, though currencies of other tariff-affected nations may decline more.

• Potentially positive for gold, as investors seek safe-haven assets.

Some market impact has already been factored in. However, with further tariff announcements likely, ongoing volatility is expected—similar to Trump’s 2018 trade war. A 15% market correction remains possible, but timing the downturn and recovery is difficult.

Investor Considerations

For long-term investors and superannuation members, the best strategy is to stay disciplined, avoid market noise (especially around Trump), and maintain a well-diversified portfolio. Timing short-term market movements is challenging, but the long-term trend in shares remains upward. If share market declines and cost-of-living concerns force Trump to moderate his tariff policies, market losses may be limited, and positive returns are still possible—albeit with higher volatility.

Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial

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Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.