As long as there has been global trade, there has been market manipulation. It is therefore surprising at the hype and lack of understanding at what a tariff trade war actually is and what it means. The worst part is it has looked like amateur hour from all world “leaders” as well as a media fanning the flames. Short term, this is bad, but longer term we should take my sons advice and take a chill pill and chillax, and instead fix the underlying issues.
A tariff is a tax on imported goods and services. The difference to for instance GST is that it is applied only to imported goods (we call our tariffs Duty, so Australia does this too), with the intention of making a country’s own companies more competitive compared to the overseas ones. It is one way of “levelling a playing field” rather than improving efficiencies, and also very important to note that the biggest losers will be the consumers in the country that puts up the tariffs – they have to pay more, as well as support inefficient domestic industries.
There is no doubt that China has been the worst offender for decades now in running a trade war when it comes to subsidising its enterprises, manipulating its currency and imposing all sorts of trade impediments. Australian products such as meat, lobster, wine and not least coal were hit with up to 200% tariffs simply for our Government asking about the origins of Covid-19. Companies that hadn’t learnt about diversification before now understand why it is important. Interestingly, China still bought Australian coal, but had it shipped to Indonesia that clipped the ticket before sending it to China to dodge the tariff but still had to pay approximately 30% more. A perfect example of the main loser being the country imposing the restrictions.
Although the US approach to this has been let’s just say ham-fisted, it’s important to understand why they have gone this way. Like all Western nations, the US is heavily indebted and continues to run massive deficits. In FY 2024 total US government spending was $US6.75 trillion and total tax revenue was $US4.92 trillion, resulting in a deficit of $US1.83 trillion, which is a deficit equal to 6.5% of their GDP and still growing. Trump was elected on a platform that US citizens were sick of paying to defend other countries and to continue to see their well-paying jobs and wealth disappear overseas, whilst adding to their debts. Trump promised income tax cuts (benefitting American individuals and companies, allowing them to keep more of their own money) which can only be done by cutting unnecessary Government spending as well as raising other taxes – in this case, taxing foreign companies. This also has the effect of making the US a more attractive investment destination, helping bring jobs and investment back to the US.
Stock markets always overreact, especially to bad news, and whilst the world’s media hyperventilate about a 10% share market fall (from over-valued levels anyway, and mostly bounced back the next day), reflect on this for a moment: Between 1999 and 2014, real median household income in the US fell from $US70,210 to $US67,350 according to the Federal Reserve Bank. This is the time frame when the US lost manufacturing overseas, particularly to China. That still means that the per capita income of the poorest state in the US is still higher than the average per capita income in Europe, and the US remains the highest per capita income country in the world. The top 10% of Americans own 88% of equities, the next 40% owns 12% and the bottom 50% have debt. Remember also that a loss is only a paper loss unless you panicked and sold. So more than half the US wouldn’t give two hoots about a temporary decline in the share market but see past this to what it can mean longer term – bringing back wealth to the US and stop other countries free-loading.
Most people don’t get Trump, even though he wrote a book called “The Art of the Deal”. Trump sees himself as a master negotiator and has already shown previously that he overplays his hand as a bluff. In the space of 1 day, he managed to get the 75 biggest trading partners with the US to the negotiating table over the next 90 days to level the playing field, with only one (China) digging its heels in to “compare size” with the world’s largest economy.
So where will this all head? The US has a 10% tariff on all imported goods and services (except China) for the next 90 days, which will increase the cost of those items. But the US is also one of the most self sufficient countries in the world, so whilst it will hit certain sectors more, it’s worth noting that it is only 15% of the goods and services in the US that are imported, and only 13% of those imports come from China (so less than 2% of all goods are affected by high tariffs even before exemptions). Whilst not insignificant, it’s not a doomsday scenario for the US. My instinct is that there will be some jitters for the next 4 months until the world stabilises with a 10% permanent tariff on all countries, so long as they open up reciprocal trade relations.
What should Australia do? Really simple: not retaliate but focus 100% on all the things we can control to help improve our competitiveness. Whilst all the major parties bluster about “taking a strong stance” and the media cries foul, remember these facts: Australia has a $23 billion trade deficit with the US (that is, in the US favour), and the US accounts for 6% of our exports. During this turmoil, Australia is actually at an advantage compared to most of the rest of the world. The risk for us is actually a further collapse of China and their demand for our mining products.
The steel industry received the most attention in the media about the effect of the tariffs, and is actually a perfect example of the incorrect market reaction: our largest steel producer actually benefits from the US tariffs because they have production in the US also. And in the same month that all this noise was going on, Whyalla Steelworks went broke. Not because of anything to do with the Trade War, but all to do with that we’ve had a few decades of declining productivity and competitiveness, with the final nail in the coffin of running out of tax payer subsidies because they went for the “renewable dream” that didn’t work and was too expensive. No country or customer in the world will actually pay a premium for any products that are lumbered with feel good attributes and inefficient/expensive processes that generate no value to the consumer.
So the lesson is simple: we need to urgently cut all types of tape and focus on our natural strengths in industries such as mining and agriculture; introduce an Industrial Relations framework that allows productivity improvements (at least 10%); and follow the rest of the world in reducing the cost of Government as well as having a 24/7 reliable and affordable power grid. That means stopping all subsidies of supposedly “free” energy products like EV’s and batteries, solar panels and wind turbines which is basically sending our tax money to China. We need to invest in our self-sufficiency (more into Defence as well as things like supply chain security such as more than 30 days’ supply of fuel). Now would also be a perfect time to address issues such as foreign ownership of Australian infrastructure, housing and businesses unless we have a reciprocal right.
Open markets with a level playing field and minimal restrictions lead to mutual prosperity and peace, as well as promotes entrepreneurship, innovation and investment.
Words from the wise
“The most dangerous negotiation is the one you don’t know you are in” – Christopher Voss, wise words for much of the world at present.
“Protectionism is a misnomer. The only people protected by tariffs, quotas and trade restrictions are those engaged in uneconomic and wasteful activity” – Walter Block
“Much of the media is written by those who have stocks for those who have stocks” – Adam Creighton
As always, Onwards and Upwards!
Fred Carlsson
General Manager
