Understanding the impact of US tariffs on Australia and strategies for mitigation

Australia’s strategic relationship with the US is underpinned by the Australia-United States Free Trade Agreement (AUSFTA) and strengthened through the AUKUS defence pact. 

Australia’s imports from the US in the last quarter of 2024 totalled A$12.9 billion, while exports were A$7.0 billion for the same period. Australia has predominantly run a trade deficit with the USA. 

It has long been touted that this trade deficit with the US is a natural protection against any US government considering imposing tariffs on Australian goods and services. This argument worked in 2018, and we were able to secure an exemption. However, this time, neither the deficit position, nor the long-standing trade agreements shield us from protectionist policies. The Trump administration’s ‘America First’ trade agenda has imposed tariffs on Australia along with allies such as Canada and Mexico.

Sectors affected by new tariffs

To understand the impact of any tariffs imposed by the US, it is important to understand that exports to US comprise only approximately 3.5% of total Australian exports behind China, Japan, South Korea and India. 

The US has previously imposed 25% tariffs on steel and 10% on aluminium imports and is now running at a flat 25% for both aluminium and steel. Though there appears to be a lot of focus on this sector in the media, all metals including aluminium, iron and steel and other metals comprise less than 10% of the total exports to the US. While steel and aluminium exports have already been targeted, the following sectors are the likely ones to be affected next should the trade tensions escalate:

• Agriculture and food exports: The US has been known to impose tariffs on agricultural imports. Though not the subject of any target just yet, Australia’s beef, wine, and dairy sectors could face heightened trade barriers.  In fact, all forms of meat and dairy export comprise approximately 20% of the total exports to the US and has a larger exposure.
• Manufacturing and retail: A key sub-sector within this is pharmaceutical products.  Further, Australian firms operating in the US with supply chains linked to Canada, Mexico, or China could also experience higher costs due to tariffs on intermediate goods.
• E-commerce and direct-to-consumer trade: Australian businesses selling products directly to US consumers, particularly those importing from China, could be impacted by tariff increases and additional customs compliance requirements.
• Freight and logistics: Trade disruptions could lead to volatility in global shipping costs and capacity, affecting Australian exports.
• Currency fluctuations: Trade tensions may lead to volatility in currency markets, affecting businesses with international operations.  

Implications for Australian businesses

The likely ripple effect of shifting US trade policies for Australian businesses include:

• Higher operating costs in the US: Supply chains that depend on tariffed goods may face increased costs, particularly for manufacturers and retailers.
• Disruptions in global supply chains: Tariffs on China and other key trading partners could have knock-on effects on Australian businesses integrated into global production networks.
• Increased compliance burden: Stricter rules of origin and regulatory scrutiny may increase costs for businesses exporting to the US.
• Potential trade diversion risks: If the US restricts imports from other countries, excess supply may be redirected to Australia which will increase competition and pressure domestic prices.
• Opportunities for Australian-made goods: If Australian goods remain exempt from US tariffs, businesses could leverage AUSFTA benefits to expand market share in the US.

Tariff mitigation strategies for Australian businesses

Unlike trade negotiations that occur in a more considered manner over a prolonged period of time, changes under the current circumstances can be very quick and not give much time for businesses and governments to adjust and adapt.  

Accordingly, businesses need to adjust quickly both in the immediate and over the medium to longer term as this era of tariff uncertainty is likely to remain under Trump 2.0.  Some of the strategies Australian businesses could consider are:

• Assess and diversify supply chains and markets:
  • Identify exposure to US tariffs across existing supply chains.
  • Source inputs from tariff-free or low-tariff economies.
  • Explore nearshoring opportunities in free trade zones.
  • Identify alternate markets for products, more specifically with partners where strong trade flows already exist.
• Customs duty optimisation:
  • Review tariff classifications and duty mitigation programs (e.g., free trade agreements, duty drawbacks, bonded warehouses).
  • Consider transfer pricing and customs valuation strategies.
• Pricing and contract adjustments:
  • Renegotiate contracts with suppliers and buyers to share or pass on tariff-related costs.
  • Assess Incoterms to optimise pricing structures.
• Freight and logistics planning:
  • Adjust shipping contracts to secure stable freight rates.
  • Evaluate inventory storage options in countries with preferential trade agreements with the US.
• Hedging against currency risks:
  • Use financial instruments to manage foreign exchange exposure.
• Monitor trade policy developments:
  • Stay informed about potential tariff announcements and policy shifts.
  • Engage with trade advisory services for timely insights.
• Engage in policy advocacy:
  • Collaborate with industry groups and government agencies to advocate for exemptions or trade-friendly policies.

Policy considerations for the Australian Government

Australia’s political landscape is also changing with a real prospect of a hung parliament or change in government. Irrespective of which government is in the seat, they have a major task ahead in protecting Australian businesses from the tariff uncertainties.  While we have already seen diplomatic shuffling in the immediate, some of the medium to longer term considerations for the Australia Government could be to:

• Strengthen trade diplomacy: Leverage AUSFTA and AUKUS ties to negotiate tariff exemptions or quota-based trade arrangements.
• Enhance domestic manufacturing: Encourage investment in local production to reduce reliance on imported goods affected by US tariffs.
• Expand market diversification efforts: Strengthen trade relationships with alternative partners in the Asia-Pacific and Europe to mitigate reliance on US demand.
• Implement safeguards against trade diversion: Monitor imports to prevent Australia from becoming a dumping ground for excess global supply.

Conclusion

The potential for higher US tariffs under the incoming administration poses risks to Australian businesses, particularly in manufacturing, agriculture, and logistics. While Australia may leverage its strong strategic ties to negotiate exemptions, businesses must not be complacent. Companies should proactively assess their exposure, explore alternative supply chains, and implement tariff mitigation strategies to navigate the shifting global trade landscape. 

Now is the time for businesses and policymakers to act to safeguard Australia’s economic interests.

FOR MORE INFORMATION

For further information, please contact Amit Kabra or Devika Shivadekar