Earlier this month, outgoing Canadian prime minister Justin Trudeau called US president Donald Trump’s tariffs “very dumb”. Given the large hit to share markets this week in response to the escalating prospect of all-out trade wars and recession, some might say Trudeau’s comment was an understatement.
Because the truth is, while much of the early economic analysis of the potential impact of tariffs has focused on country-level inflation and growth, the story is much more complicated, and the ripple effects are already travelling far and wide.
In its latest Statement on Monetary Policy, the Reserve Bank of Australia had a fairly optimistic view of the likely economic impact on Australia of Trump’s tariffs, expecting growth to be shaved by only the narrowest of margins over the next two years, although admitting there were downside risks. We don’t yet know just how many more exports may be in the firing line.
Even so, while Australia may not be slammed on its economic fundamentals anywhere near to the same extent as countries such as Canada or Mexico or China, we are not completely immune.
There are multiple channels through which tariffs will affect Australians – both those now placed on our own exports of aluminium and steel to the US, as well as those enacted throughout the world. Many American products that Australian businesses import for their own use, such as cars, trucks and specialist machinery and equipment, will become more expensive because these things invariably involve many components sourced globally. Substitutes for these goods and their inputs are not always readily available and, in this case, business costs will rise. Similarly, export demand for our raw inputs from third countries making goods headed to the US will see either demand and/or prices weaken. At the corporate level, there will be consequences for many.
And those channels of impact don’t stop at the country or corporate level. The majority of us are already watching a sea of red as equity market falls have produced substantial losses in our superannuation balances.
Just under one-third of Australian super fund balances are held in overseas listed equities so, even if we don’t face recession at home, and our share market manages to recover some of its recent losses, those balances remain vulnerable to the brewing global economic storm. Indeed, over the weekend, Trump himself could not rule out a recession in the US as a result of his tariff policy, which sent already nervous markets into further decline.
Undoubtedly, some of the market losses this week are a fear response to the punch and counterpunch of countries going tit-for-tat on raising tariffs in retaliation for US actions. We have no certainty around what the ultimate size or duration of economic fallout will be, because we still have no certainty around what tariff regimes will look like when the dust settles (nor other chaotic policies that may be on Trump’s agenda).
But while this fear, and current market volatility, may well subside in due course, tariffs will continue to have some impact on superannuation returns by reducing economic growth and corporate profitability both here and overseas. Costs will be higher, demand will be lower and supply chains will be disrupted. Add to this increased uncertainty, which hampers corporate investment and employment, reducing future corporate growth potential and returns to shareholders, and the outlook – already uncertain – begins to look considerably less rosy.
Of course, there will be responses that will help cushion the blows, whether from governments, corporates or central banks, and our flexible exchange rate. And super fund managers will respond to recent events through changes to asset allocation, attempting to navigate short-term volatility and uncertainty against long-term value.
But all these hits come at a time when Australia, and the rest of the world, are only just beginning to emerge from the pandemic and its aftermath. While we are just seeing the signs that the pain of higher interest rates has indeed paid a dividend in bringing inflation close to target, our consumer and business confidence levels remain in a delicate condition.
It seems cruel that Trump’s senseless tariffs will likely extend the economic malaise felt by so many over the past few years, here and around the world.
Almost 250 years ago, one of the founding fathers of economics, Adam Smith, published his seminal work, The Wealth of Nations, in which he explained how free trade benefited everyone. We are about to get a painful global lesson in why we should listen to, rather than denigrate, experts. No one wins a trade war.