The World is ‘Tariffied’

Global trade has been thrown into turmoil following U.S. President Donald Trump’s announcement of sweeping tariffs on April 2, 2025, taking everyone by surprise by its size and extent. The move marks a dramatic escalation of protectionist policies, reigniting trade wars with key partners such as China, the European Union, Canada, and Mexico. The formula behind the tariff calculations, heavily skewed by goods trade imbalances while ignoring the U.S.’s strength in services, has drawn sharp criticism for its economic distortions.

The immediate fallout has been severe, with retaliatory measures swiftly enacted by affected nations. Meanwhile, financial markets reacted sharply, with the U.S. dollar experiencing wild swings and global investors grappling with the risk of an economic slowdown.

Australia has not been spared, facing a blanket 10 per cent tariff on exports to the U.S, exacerbating concerns over rising trade barriers. While the direct exposure remains limited, the broader risks from China, its largest trading partner, pose significant challenges, particularly if demand for Australian commodities falters.

Against this backdrop, policymakers face difficult decisions. The Reserve Bank of Australia (RBA) will be weighing the risks of slowing global trade against domestic inflation and interest rate expectations. As the world adjusts to President Trump’s tariff-first approach, the long-term consequences of this economic realignment remain highly unpredictable.

While economic data guides policymaking, sentiment is equally vital in steering the economy. Confidence shapes spending, investment, and hiring, amplifying or dampening policy effects. Weak sentiment can stall growth despite strong data, while excessive optimism risks instability. The RBA and the government must balance hard data with psychological factors to maintain stability without overcorrection.

On April 2, 2025, United States (U.S.) President Donald Trump, dubbing the day “Liberation Day,” announced sweeping tariffs on most if not all its global trading partners. Trade tariffs are taxes imposed by governments on imported goods, primarily aimed at protecting domestic industries and generating revenue. Having said that, the formula used by the U.S. administration to come up with tariff rates is, to put it nicely, quite interesting. The U.S. trade representative’s formula ties tariffs to the trade deficit, focusing solely on goods trade while excluding services, where the U.S. is a major exporter. It calculates the tariff by determining the ratio of a country's trade deficit to its total exports and applying a 50 per cent adjustment. This approach results in significant variations, disproportionately penalising countries with trade surpluses. Meanwhile, nations without a trade deficit face a blanket 10 per cent tariff on all goods. The formula is fundamentally flawed, as trade imbalances can result from factors such as differences in national savings and investment rates, currency exchange rates, and varying levels of economic development. Additionally, structural factors like consumer preferences, domestic production capabilities, and government policies can influence the balance between imports and exports. It is certainly not as black and white as claiming that the other trade partners are engaging in unfair trade practises.

By making foreign products more expensive, tariffs encourage consumers to buy locally produced goods, fostering domestic economic growth. However, they also increase costs for businesses and consumers, reduce product variety, and can provoke retaliatory measures from trading partners. In the global context, tariffs are often used as tools of economic diplomacy or geopolitical strategy to influence international power dynamics, secure resources, or protect strategic industries. While proponents argue that tariffs can reduce trade deficits and safeguard jobs, critics highlight their potential to disrupt global supply chains, escalate trade wars, and undermine the principles of globalisation.

President Trump’s latest wave of tariffs marks a dramatic escalation in global trade tensions, signalling a return to the protectionist policies that defined his first term. The decision to impose blanket tariffs on key trading partners, including Canada, Mexico, China, and the European Union, has already sparked a series of retaliatory measures. While the U.S. administration argues that these policies will “enrich U.S. citizens” by reshoring jobs and boosting domestic industries, they are more likely to lead to higher prices for consumers, supply chain disruptions, and potential economic slowdowns across multiple regions. China has responded with a 34 per cent tariff on all U.S. imports, alongside export controls on rare earth materials essential for high-tech production. The European Union has announced duties on $28 billion worth of American goods, targeting industrial machinery, textiles, and agricultural products. Canada has matched the U.S's 25 per cent auto tariffs and imposed C$29.8 billion ($20.7 billion) in countermeasures, while Mexico is weighing its response.

The implications of these tariffs extend beyond economic concerns, affecting diplomatic relationships and international policy alignments. Countries like China, Canada, and the EU have not only responded with their own countermeasures but are also exploring alternative trade alliances to mitigate dependence on U.S. markets. The European Union, initially delaying its retaliatory measures, has now made it clear that it will not stand by as American tariffs disrupt global trade. Meanwhile, China’s aggressive response—including higher tariffs on U.S. agricultural products and export restrictions—could have far-reaching consequences for global supply chains, particularly in technology and energy sectors.

For the rest of the world, the U.S. tariff policies create both challenges and opportunities. Countries not directly targeted by these measures may find new trade openings as businesses seek to circumvent rising costs associated with them. However, for many economies, the unpredictability of President Trump’s policies is a major concern. As global trade flows shift, emerging markets may struggle to absorb the shocks, particularly those heavily reliant on U.S. exports or supply chain integration. In an interconnected world, a tariff-first approach risks undermining decades of trade liberalisation while reshaping economic alliances.

Australia and the Tariff Fallout

The U.S. administration has imposed a 10 per cent tariff on all Australian exports to the United States as part of the broader "Declaration of Economic Independence." This is on top of the flat 25 per cent rate already in place for aluminium and steel exports. President Trump justified the move by singling out and criticising Australia’s longstanding restrictions on U.S. beef imports, claiming that such policies unfairly disadvantaged American farmers. Although the 10 per cent rate imposed on Australia is relatively low compared to other countries, it still presents challenges for Australian exporters who rely heavily on the U.S. market. The tariffs have raised concerns about the escalation of global protectionism and the risk of disrupting Australia’s trade-dependent economy.

As a result, Australia now faces broader exposure to U.S. tariffs. While the U.S. accounts for around 5 per cent of total Australian exports, these new barriers could have far-reaching consequences, especially for key industries. Agriculture, which represents around 20 per cent of Australian exports to the U.S., is particularly vulnerable, with sectors such as beef, wine, and dairy now at risk of facing higher costs and reduced competitiveness in the American market. Other sectors, including manufacturing—particularly pharmaceuticals—and retail supply chains, are also likely to feel the pinch, especially for businesses with links to tariff-affected regions like Canada, Mexico, and China. Additionally, Australian e-commerce businesses selling directly to U.S. consumers may face increased costs and heightened regulatory challenges. Volatility in global freight and logistics costs, combined with currency fluctuations, further complicates the trade landscape for Australian businesses.

 At the time of writing this, the U.S. dollar initially plunged to a six-month low against the Euro on April 3, as markets priced in risks of a U.S. recession and retaliatory tariffs eroding economic growth. However, it later rebounded slightly after strong March jobs data, though concerns about its global reserve currency status persisted due to tariff-induced market jitters. Meanwhile, the Australian dollar (AUD) faced intense pressure, plummeting to a five-year low below 0.5933 against the U.S. dollar as fears of a China-U.S. trade war escalation rattled market sentiment. The AUD/USD briefly recovered to 0.60 but remained vulnerable to risk-off sentiment, with traders pricing in aggressive Reserve Bank rate cuts (up to 110 basis points in 2025) to counter potential trade shocks.

This currency volatility disrupts trade dynamics significantly. A weaker AUD makes Australian exports like commodities more competitive globally, but it inflates import costs for machinery and consumer goods, particularly from the U.S., where 10 per cent tariffs already strain bilateral trade. Meanwhile, dollar instability complicates pricing for U.S. importers and exporters, as erratic exchange rates amplify tariff-related cost uncertainties. For Australia, the dual pressure of tariffs and a depreciating currency risks stagflationary effects, where export gains from a weaker AUD could be offset by reduced global demand amid escalating protectionism.

Australia’s Position in the U.S.-China Trade Conflict

Australia faces asymmetric risks in the U.S.-China trade war, with limited direct exposure to U.S. tariffs but significant indirect vulnerabilities through its reliance on China. While U.S. tariffs on aluminium and steel affect just 0.2 per cent of Australia’s goods exports, China’s role as the destination for 37 per cent of exports (primarily iron ore, coal, and LNG) makes it the critical pressure point. A slowdown in China’s economy due to U.S. tariffs could weaken demand for Australian resources, particularly if global commodity prices decline amid reduced manufacturing activity. However, China’s potential domestic stimulus (e.g., infrastructure spending) may cushion demand for Australian iron ore and coal, offsetting some losses. Treasury forecasts a 0.1 per cent GDP contraction while adding 0.2 percentage points to inflation in 2025, driven by weaker global demand and trade uncertainty. Having said that, neither the Treasury nor the Reserve Bank of Australia (RBA) nor we expect a recession in Australia because of the trade skirmishes. 

We feel China is much better prepared this time to face unpredictability. Beijing’s retaliatory tariffs and domestic measures reflect a calculated approach to mitigate trade war fallout. State-backed initiatives to boost self-sufficiency, alongside plans to stabilise markets through stock purchases and economic stimulus, demonstrate confidence in managing short-term disruptions. Bloomberg reports that China has strategically reduced reliance on U.S. crops by diversifying suppliers, notably increasing imports from Brazil, which now accounts for over 70 per cent of its soybean purchases. This shift, coupled with record domestic grain production and ample stockpiles, has bolstered Beijing’s resilience. Meanwhile, U.S. exports face mounting challenges, with corn and wheat sales to China dwindling to minimal levels and rising Brazilian bean prices adding further strain. China’s recent stockpiling of U.S. soybeans — importing 16 million tons between November 2024 and February 2025 — provides a temporary buffer, but prolonged tensions could test its ability to manage supply gaps once the next U.S. harvest arrives.

Having said that, risks remain; rising Brazilian soybean prices and global anti-dumping measures, such as those threatening China’s steel exports, could exacerbate trade frictions. Policymakers appear poised to expedite stimulus to counter broader economic headwinds, but the escalation underscores China’s resolve to retaliate aggressively, signalling a protracted standoff with global trade implications.

Strategic challenges centre on balancing short-term risks with long-term diversification. Australia’s heavy reliance on China, accounting for 6.6 per cent of nominal GDP in exports, leaves it exposed to prolonged U.S.-China tensions, which could suppress global confidence and investment. Mitigation hinges on accelerating trade partnerships in high-growth regions (e.g., India, ASEAN) and addressing domestic productivity gaps to reduce dependency on commodity exports. Without swift diversification, Australia’s trade-dependent economy risks stagnation amid escalating protectionism.

Impact on Consumer Sentiment

The latest tariff developments and associated market instability have markedly eroded Australian consumer optimism. By April 2025, confidence levels had hit a six-month trough, with Westpac’s survey recording a 6 per cent slide to 90.1 points. The steepest drop occurred immediately after the US imposed a 10 per cent levy on Australian exports, triggering a double-digit percentage decline in public confidence. Households are growing increasingly anxious about global trade instability, with perceptions of personal finances and the broader economic horizon deteriorating sharply. Key indicators, such as year-on-year family financial assessments, tumbled by 8.5 per cent, while the 12-month economic outlook dipped by 5.7 per cent. This weakening morale reflects heightened fears of economic spillover from trade disputes, which may curb spending and suppress domestic demand.

Business Sector Pressures

Australian firms are similarly under strain, with confidence languishing below historical averages. March 2025 data from NAB’s business survey revealed a dip in confidence to -3, alongside only marginal gains in operational conditions (+4), as companies remained cautious despite slight improvements in sales and hiring. These figures preceded April’s tariff escalations, implying that recent trade disruptions could deepen corporate pessimism. The combination of policy uncertainty and equity market declines threatens to stifle investment and consumption, potentially extending Australia’s period of lacklustre economic performance. Both households and enterprises appear to be preparing for sustained turbulence as global trade frictions intensify.

Read our tariff mitigation strategies here: Navigating the Ripple Effects 

Global economic conditions remain uncertain, with shifting trade policies, volatile markets, and geopolitical tensions clouding the outlook. However, domestically, Australia has seen some resilient developments, including steady employment levels, moderating inflation, and ongoing government support measures. While external risks persist, these factors provide a degree of stability, supporting cautious optimism for the near-term economic trajectory.

December 2024 inflation data showed a modest 0.2 per cent rise in the headline Consumer Price Index (CPI), bringing annual inflation to 2.4 per cent. The more significant trimmed mean measure, which strips out volatile price movements, increased by 0.5 per cent quarter-on-quarter and 3.2 per cent year-on-year. Notably, goods inflation fell to its lowest level since 2016 at 0.8 per cent, while services inflation remained elevated at 4.3 per cent. Non-discretionary inflation eased to 1.8 per cent, whereas discretionary inflation edged up to 3.2 per cent, reflecting shifting consumer spending patterns. Indeed, government interventions provided some relief, but overall price pressures have been significantly easing, signalling a gradual stabilisation in inflation dynamics. While restrictive financial conditions are curbing demand and slowing inflation faster than expected, uncertainty lingers amid shifting global trade policies.

Looking ahead, expect inflation to stay firmly within the Reserve Bank of Australia (RBA)’s target range in 2025. We expect headline and trimmed mean inflation to print 2.2 per cent and 2.8 per cent on a yearly basis, respectively, in the March quarter of 2025. Leading up to the quarterly inflation data release on April 30, February’s monthly CPI indicator showed a 2.4 per cent annual rise, largely due to falling electricity prices in Victoria following another round of Commonwealth Energy Bill Relief Fund rebates. The trimmed mean CPI eased to 2.7 per cent from 2.8 per cent in January, reflecting a gradual moderation in underlying inflation. Electricity prices dropped 2.5 per cent in February, driven by rebate timing, and recorded a sharp 13.2 per cent annual decline. With the rebate scheme extended, a full rebound in electricity prices is likely only in the latter half of 2025.

On another note, oil prices have been falling, which should help ease further price pressures in the coming months, partly as a result of a boost in supply as OPEC+ looks to increase its production. The caveat, however, is that the other reason for the sharp decline in oil prices is largely driven by concerns over a potential global recession, much like the recent market volatility. If a downturn materializes, the benefit of lower oil prices may be overshadowed by broader economic challenges.

Looking ahead, we anticipate a gradual easing of the labour market, though slower than previously anticipated. We expect the unemployment rate to settle around 4.3 per cent this year in line with the Reserve Bank of Australia (RBA)’s forecasts. While we do not place much emphasis on the monthly fluctuations in employment figures, we remain vigilant about the underlying tightness. The sharp drop in employment in February does not alter the broader outlook. Indeed, a weakening job market has long been anticipated however, the decline in February is a statistical bounce back following months of stronger-than-expected job starts in the new year. Looking ahead, we expect business sentiment around hiring to remain quite tepid in the face of uncertainty particularly as businesses delay expansion plans and adopt a more cautious approach to workforce growth, prioritizing efficiency over new hires.

Despite a decline in employment in February, measures of labour underutilisation are at relatively low rates and our on the ground interactions with businesses continue to suggest that availability of labour is still a constraint, particularly when it comes to certain skillsets. This is a theme we have been hearing since a good part of last year. Consequently, wage pressures have begun to ease but given dismal productivity growth, unit labour costs continue to remain high.

We shift our focus from the timing of the rate cuts to the terminal rate and continue to hold onto our view from last year of a terminal rate of 3.35 per cent by 4Q25. Our baseline assumption is for the Reserve Bank of Australia (RBA) to continue its easing path with 25bps cuts in 2Q25, 3Q25 and 4Q25 each.

The RBA's approach to interest rates hinges on a delicate balance between moderating inflation and navigating global uncertainties, particularly concerning potential tariff escalations and their impact on trade. The February rate cut, while acknowledging progress on disinflation, was tempered by cautious messaging from Governor Bullock, indicating a data-dependent approach while challenging market expectations of further near-term easing. This was reinforced by the decision to hold rates steady at the April meeting. The RBA's key considerations will likely revolve around indicators that confirm sustainable progress toward its inflation target: private sector wage growth (which grew by 0.7 per cent in the December quarter), productivity metrics (given concerns about high unit labour costs), and the degree to which current financial conditions restrict demand.

If inflation falls faster than anticipated due to easing capacity constraints and overestimated labour market tightness, the RBA might implement more aggressive easing than currently projected. Conversely, escalating global trade tensions could trigger a slowdown in China, disrupting supply chains, dampening investment, and increasing import costs. In this scenario, the RBA may maintain a more restrictive stance to manage inflationary pressures while still seeing some room to fall under target due to current pressures and consumer sentiment. 

A Trump presidency presents both upside and downside risks. Shifted trade patterns could benefit Australia through redirected goods which would mean lower prices for some Australian consumers, but it would mean a stronger impact on China and Australian exports. Ultimately, this weakens the AUD and makes it very difficult for the RBA to predict the path forward given existing downside risks.

What we can say is that the RBA, just like this time last year, remains data dependent and any policy adjustments from here forward will require evidence for the need and opportunity. As such, while we expect the board to adjust rates, we expect them to do so over sustained periods of time and in the event that data signals the direction clearly. The long game is set and as far as current market participants and the board are aware, the path is dependent on external factors such as trade (global tariffs), domestic factors such as productivity and economic activity (consumer sentiment) and overall internal factors which can point to whether disinflation can be achieved or not (wages and salaries). 

While economic data provides a crucial foundation for policymaking, managing sentiment is equally important in steering the economy. Consumer and business confidence influence spending, investment, and hiring decisions, often amplifying or dampening the effects of economic policies. If sentiment weakens, even strong data may not translate into economic momentum, while excessive optimism can fuel instability. For the RBA and the government, the challenge lies in balancing hard data with the psychological factors that shape economic behaviour, ensuring policy signals foster stability without overcorrecting or creating unnecessary anxiety.