US-China tariff battle begins: What it means for Australia

Nerida Conisbee,
Ray White Chief Economist

What does the US-China tariff battle mean for Australia?

US tariffs on Chinese imports began on February 4, with a 10 per cent duty imposed on all goods. China immediately hit back with their own tariffs, placing 15 per cent on coal and liquefied natural gas imports from the US.

China will also charge 10 per cent higher duties on American crude oil, farm equipment, and certain cars and trucks, while putting in place export controls on certain products related to critical minerals. These are set to come into effect today.

This round of tariffs is likely just the beginning, with more expected to follow. US President Donald Trump has previously used tariffs as a negotiating tactic – while the tariffs on Canada and Mexico were never implemented, negatively, they caused a drop in the S&P500 with the only positive securing a modest additional 10,000 extra troops from Mexico. The approach damaged relationships with both countries.

Even though tariffs typically go against Republican views on protectionism, many seem to dislike tax hikes even more. Trump’s tax cuts from 2017 are due to expire this year and can’t be re-enacted because they would increase the budget deficit too much under congressional rules. The China tariffs could potentially offset this budget impact and allow the tax cuts to remain.

China, however, is proving to be a much less friendly negotiating partner. The tariffs will drive up inflation in both countries and could easily escalate with further tariffs being put in place.

For Australia, US tariffs would have minimal direct impact. We export around $15 billion worth of goods to the US, mainly beef, wine and pharmaceutical products, as our fifth biggest export market.

The real challenge comes from the impact of tariffs on China. Initially, this could work in our favor. If China can’t sell as many goods to the US, they may become cheaper for us. Electric cars from China are one product likely to get cheaper for Australians in the short term.

Looking further ahead, China’s rising inflation (and to a lesser extent the US) will eventually be passed on as increased cost of goods for Australians. Australia’s inflation rate is currently coming down and is potentially low enough for the RBA to cut interest rates later this month.

The escalation in the tariff battle is not great news for our inflation outlook. Even more concerning is that even though the RBA will need to increase interest rates as a result, it is likely to have a minimal impact on the fundamental cause of the inflation increase. Australian rate rises can’t stop a trade war.