Chart of the Month - November 2024

The world is holding its breath as it waits to see what President-Elect Donald Trump will actually do with tariffs. But we have seen this movie before. Trump introduced tariffs in his first term, on steel, aluminum, solar panels, and washing machines; Australia was exempted. He also imposed tariffs of up to 25% on a range of Chinese goods. Biden kept up the tariff pressure on China but let the other tariffs expire.

However, Trump Tariffs version 2.0, are expected to be broader and steeper: 10% to 20% on all imports, 25% for Canada and Mexico, and 60% for China.

Fortunately for Australia, the US is only its 5th largest export destination and Australia will again be hoping for an exemption. However, as the chart below suggests the indirect impact on our exports to China may hurt Australia more than direct tariffs on our goods from the US. 

Australian exports to the US

Australia was able to secure an exemption for the tariffs on steel and aluminum in Trump’s first term and will be hoping for another exemption from any new Trump tariffs.

“Australia doesn’t have a trade deficit with the US so that is what they are focused on,” Sarah Bianchi, former Deputy US Trade Representative for Asia (2021-24).

Australia’s main exports to the US (including gold, beef, lamb and blood products) are also not the type of manufactured products likely to raise Trump’s ire. 

From the Australian perspective, while the US is Australia’s 5th largest export destination, Australia’s exports to Japan are 3x larger and 10x larger to China. A 20% tariff on Australian exports to the US would be bad but not a disaster.

Where it could really hurt

China’s top 5 exports to the US include mobile phones (USD 38.4 bn), and lithium-ion batteries (USD 13.6 bn) (see chart below).

A tariff on Chinese lithium-ion battery exports to the US would have a significant impact on Australian exports of lithium concentrate to China. Over 97% of Australia’s lithium exports go to China.

Less obvious, however, is the amount of iron and steel in mobile phones and computer devices. For example, iron makes up around 14% of an iphone, and iron and steel together make up around 7% of a laptop. Around 8% of China’s steel production in 2023 went to durable goods such as mobile phones and laptops. Tariffs on these goods would have some level of impact on Australian iron ore.

Further, around 30% of Chinese steel goes into the manufacture of machinery which is China’s 9th largest export to the US (USD 3.9 bn).

Final thoughts

International trade is dynamic. Some domestic and foreign-owned companies in China relocated, partly or fully, to southeast Asia, India and even to the US in response to Trump’s first-term tariffs. Some exports were also rerouted and “dressed-up” in second countries like Mexico before hitting the US. No country will sit still and wear the full impact of the tariffs.  

As China adjusts to the new round of US tariffs, it will lessen any negative impact on Australia’s largest exports to China. However, there will still be an impact and likely much larger than any negative impact from any tariffs on Australia’s exports to the US.

Australia too will adapt. It also has recent practice from its recent trade spat with China, which included Chinese bans on Australian wine, coal and other select exports.

The biggest losers from the tariffs will be US consumers who will pay more for many of their goods. The Federal Reserve’s fight against inflation may be entering a new phase.