The federal government’s economic think tank says Australia will likely be a winner from Donald Trump’s tariffs if it does not retaliate and that we would be better off by removing more of the nation’s remaining tariffs.
In its annual trade and assistance review, modelling by the Productivity Commission finds that Donald Trump’s “liberation day” tariffs — as well as sector-specific tariffs on aluminium, steel and automobiles and parts — could lead to a 0.37 per cent increase in Australia’s economic output, as measured by real Gross Domestic Product (GDP).
“What happens is that there’s capital outflow from the United States that’s got to go somewhere. It comes to Australia as well as other countries,” explained Productivity Commission deputy chair Alex Robson on Radio National Breakfast.
“And the overall impact on us in the long run is that capital inflow increases our production and is actually good for GDP in Australia, by a very small amount.”
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Professor Robson said that Australia would benefit in part because it was at the lower end of tariff rates being proposed by the US government.
“Australia, we have a 10 per cent tariff imposed on us by the United States. But other countries, it’s much higher than that. And so, that tends to benefit us in a relative sense,” he said.
Trade retaliation is a bigger risk
Overnight, US President Trump signed an executive order further delaying the implementation of his so-called “liberation day” tariffs, which were due to commence at 12:01am US Eastern Standard Time on July 9.
The tariffs, originally announced on April 2, will now not take effect until August 1, while negotiations continue with affected countries.
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Mr Trump has been publishing on his Truth Social platform the letters he has sent to global leaders flagging his proposed tariff rates that would kick in on August 1, unless negotiations see the US strike a trade deal with the nominated countries in the meantime.
In most cases, these tariffs are the same or similar to those announced on “liberation day” in April, with two of Australia’s major trading partners, Japan and South Korea, threatened with 25 per cent tariffs and another, Indonesia, facing a 32 per cent tax on its exports to the US.
Paul Ashworth, the chief North America economist with Capital Economics, says he does not anticipate major economic fallout within the US, even if these threatened tariffs are implemented on August 1.
“If none of these 14 countries manage to seal a preliminary trade deal (and assuming Trump doesn’t delay implementation for another month) then the effective tariff rate on US imports would rise from 15.5 per cent to 17.3 per cent,” he wrote in a note.
Donald Trump holds up a chart announcing his “liberation day” tariffs in April.
“That would push it even further above 20th-century norms — it was 2.5 per cent last year — but given the very muted impact of tariffs on US consumer prices up to now and that the tariff revenues are now being recycled thanks to the Republican mega-bill that Congress just passed, the fallout should be manageable,” he wrote.
However, Professor Robson warned that the possibility of widespread retaliation against the US tariffs posed a bigger risk to the global, and Australian, economy.
“The main concern in all of this is the uncertainty that the different announcements create in the global trading environment and the risk of escalation and retaliation around the world,” he told Radio National Breakfast.
“If there was more broad escalation, even with countries imposing tariffs on each other and not only the United States, that would be very bad for Australia,” he said.
Australia should remove remaining ‘nuisance tariffs’
Rather than retaliating, which Professor Robson said would be economically counterproductive, the Productivity Commission has urged Australia’s government to unilaterally remove more tariffs.
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It says there are still too many “nuisance tariffs” in place that generate little revenue and impose high costs on businesses.
“We estimate that, in 2023-24, the tariff regime imposed compliance costs of between $1.3 billion and $4 billion, while collecting $2 billion in revenue,” its report says.
Professor Robson said last year, the government abolished 457 nuisance tariffs that had compliance costs that far outweighed the revenue collected, and it could eliminate hundreds more.
“We’ve said to them to go further, and we’ve identified a further 315 nuisance tariffs that could be removed and which would make Australia better off,”
he said.
He said those tariffs cost Australia’s economy roughly twice as much to collect as they raised in revenue.
“Currently, 90 per cent of imports into Australia are tariff-free and the remaining have about a 5 per cent tariff imposed on them,” he said.
“They raise revenue of about $2 billion, but the compliance costs are up to $4 billion, and also they’re not protecting any industries.”
Caution about a Future Made in Australia
The Productivity Commission has also urged caution about the Albanese government’s signature “Future Made in Australia” industry support program.
It said budgetary assistance remained the main form of industry assistance in Australia, and the government’s Future Made in Australia agenda was cementing that growing role.
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“This mirrors international practice seen in the European Green Deal, the Made-in-Canada plan, China’s industrial subsidy programs and the Inflation Reduction Act in the United States,” its report said.
It said well-designed industry policy could offer benefits, but when it was poorly designed, it could be costly for governments, act as a form of trade protection and distort the allocation of Australia’s resources.
“This underscores the critical need for transparency, as is delivered through the Trade and Assistance Review, ongoing evaluation and review and clear exit strategies,” its report said.
Professor Robson said the Albanese government had legitimate policy objectives around supply chain resilience and transitioning to net zero, but it also had to make sure that the benefits of its spending on those Future Made in Australia programs would outweigh the costs.
“The government’s put a framework around that. We think that’s good,” he told Radio National.
“But it remains to be seen whether that spending will produce the benefits that the government says it will.”