Trade & investment, explained.
The US political climate makes it very hard for the US government to raise taxes, so the tariff revenue is just too useful (Daniel Torok/Official White House Photo)
Tariffs are likely here to stay. There is no gain from retaliation – Australia’s best defence is diplomacy and playing by the rules.
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Here we go again – the latest in the Trump tariff sagaHere we go again – the latest in the Trump tariff saga
With one set of tariff measures set to expire, the Trump administration has reached for another. The latest switch – which has added to the burden put on Australia – reinforces that US tariffs are likely here to stay in one form or other. The US political climate makes it very hard for the US government to raise taxes, so the tariff revenue (Opens in new window) is just too useful, even if a large share of the “liberation day” tariffs have to be paid back (Opens in new window)because the Supreme Court ruled that the International Emergency Economic Powers Act does not give the executive the right to levy taxes.
With no prospect for a major reversal on the US imposing tariffs, Australia’s policy focus should be less about weathering the US storm, and more on working with others to find calmer waters.
As the Section 122 temporary tariffs allowed for rebalancing the balance of payments were due to expire, the Trump administration has reached for other levers to pull. Section 301 of the 1974 Trade Act gives the administration the powers to impose tariffs on countries that they assess do not have sufficient laws to prevent unreasonable or discriminatory trade practices.
On Thursday, the Trump administration announced tariffs of 10% to 12.5% on 60 countries on the basis that they do not have adequate laws to ban the importation of goods made by slave labour. Australia is one of the countries to be hit, with the higher-end rate of 12.5%, (Opens in new window) an increase on the current temporary 10%. The higher tariffs on Australian exports of steel and aluminium products under the national-security-based Section 232 of the 1962 Trade Expansion Act remain in place.
What should Australia do in response to this latest salvo? Strengthening (Opens in new window) the 2018 Modern Slavery Act is a good move, not because it is likely to see Australia treated any differently by the United States, but because it is the right thing to do.
Australia can and should push back diplomatically on these or other tariffs that might be coming down the line as the Trump administration continues to explore ways to impose additional tariffs. Australia is not one of the 15 countries as well as the European Union currently under investigation (Opens in new window) by the Office of the US Trade Representative for unfair manufacturing practices that generate a surplus under Section 122, but is still vulnerable to national-security-based investigations.
Shipping containers strewn at the New Orleans Terminal in the aftermath of Hurricane Ida, August 2021 (Michael Carmouche/US CBP)
All this comes amid a fiscal reckoning. The projections for the US budget deficit (Opens in new window)are finally scaring bond markets (Opens in new window), increasing the cost for the US government of rolling over existing debt, in addition to financing the ever-growing deficit. While the GENIUS Act (Opens in new window) (the Guiding and Establishing National Innovation for US Stablecoins Act) has and will continue to support growth in the stablecoin market, which creates additional demand for US Treasuries to back the stablecoins, there are limits on the rate of growth. Central banks in a number of countries are introducing their own digital currencies, (Opens in new window) which will compete with the US dollar denominated stablecoins, so this avenue to keep the cost of US debt lower is limited.
In this environment any source of tax revenue is hard to turn off, especially one that can be framed as being paid for by foreigners.
While useful to frame tariffs as falling on foreigners, the reality is different – it is US consumers and businesses (Opens in new window) reliant on imported inputs that pay the vast share of the tariffs. But these costs are hidden in other sources of rising prices for consumers, and businesses with political influence can often negotiate a carve out that benefits them.
The reality is different – it is US consumers and businesses reliant on imported inputs that pay the vast share of the tariffs.
As a revenue-raising measure tariffs have their problems. A uniform tariff on all imports can be a sensible option to raise tax revenue when other avenues are too hard. But the US tariffs have not been uniform, with different rates on different goods including by country of origin. While this discretion has helped the US provide bargaining leverage in trade negotiations, businesses need to spend more time and effort sourcing the least cost inputs. Greater uncertainty, rising input costs and rising transactions costs, all reduce economic growth, slowing the growth of the US tax base.
US imports are also a fairly small share of its economy, limiting the potential revenue. Over time higher tariffs rates will reduce imports, shrinking this tax base. But for a Congress with declining options for reducing spending as non-defence discretionary programs are now less than 15% of the budget, (Opens in new window) any revenue will be hard to turn down.
Australia needs to prepare for a world in which US tariffs will remain higher, and potentially a world in which the US will continue to use tariffs as an economic weapon to extract concessions (Opens in new window) out of trade partners. Most countries have chosen not to respond in kind to the US tariffs, sparing the worst possible outcome of a generalised trade war. The global economy, although rocked by the US-Israel-Iran war, has been resilient (Opens in new window).
Trade and investment can continue to be important drivers of global growth as long as most countries continue to cooperate and keep tariffs low and markets open. It is in Australia’s interest to promote widespread cooperation on maintaining the trade and investment rules that have delivered greater prosperity for most people and countries over the past 80 years.
About the author
Jenny Gordon
Dr Jenny Gordon is a Nonresident Fellow at the Lowy Institute and also a Honorary Professor at the Centre for Social Research and Methods at the Australian National University.
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