Donald Trump’s tariff tactics: Art of the Deal is our best hope

Less than a month after the election, fears of a Trump-World Order have been confirmed.

Slapping an additional 10 per cent tariff on Chinese exports, as he plans to do via executive order the day he takes office on January 20, will crimp our most important trading partner and flow through to our budget bottom line. That tariff was at least anticipated.

But by saying he will place a 25 per cent tariff on the USA’s largest trading partners in Canada and Mexico, Mr Trump is upending the global rules-based trading system and ushering in a period where uncertainty and distrust will erode the foundations underpinning the global economy.

Mr Trump sees himself as a dealmaker. In an interview with Bloomberg Businessweek in July this year he boasted of besting Japan and China, who he accused of unfairly devaluing their currencies.

“Man, is it good for negotiation,” he said of tariffs. “I’ve had countries that were potentially extremely hostile coming away and say ‘Please sir, stop with the tariffs. Stop’. They would do anything.”

Driven by an increasingly aggressive ‘America First’ philosophy, Trump has transformed tariffs from an economic lever into a geopolitical weapon.

President-elect Trump’s pick for Treasury Secretary, former hedge fund trader Scott Bessent, was seen by Wall Street as a sensible choice. But perhaps that was too optimistic.

Mr Bessent has said he want to be part of a “grand global economic reordering”, according to reports by the Wall Street Journal, and has called for using tariffs like sanctions to promote US interests abroad.

The “tariff gun will always be loaded and on the table but rarely discharged” he wrote to investors, according to the article.

That strategy is now in play by linking tariffs to immigration and importation of the drug fentanyl. The President-elect is sending a message to every other trading partner: do my bidding or suffer the consequences.

It is a highly destabilising strategy, and one that will have multinational executives scrambling risk committees to pore over investment plans at a time when the world is in go-slow mode.

By acting so decisively, we can now conclude that some of Mr Trump’s other policies that will be quite damaging to Australia are far more likely to occur. After his original 2016 campaign, the consensus was to watch what Trump does, not what he says. With the shackles of a second term removed and a cabinet of acolytes, that moderation appears to be over.

Mr Bessent wants to make the Trump tax cuts law as soon as he takes his cabinet post. That would swell the US Budget deficits to nearly double the long term average as a percentage of the US economy. Tax cuts of that nature will be highly inflationary. He has also promised to get down the US debt, but that process will take far longer.

With these tariffs now proposed more inflationary fuel is added to the fire.

That will have spillover effects on Australia. Higher inflation in the US will drive upward pressure on inflation here. Bond markets will see a world where the US Federal Reserve will need to raise interest rates to bring inflation down. That pushes the US dollar up, and the Australian dollar falls. We have already seen that take place today, with the Aussie dropping to its lowest level against the dollar in a month on the news.

A lower dollar may be good for exports, but it is problematic for inflation. Imported goods become more expensive, pushing up overall prices.

Inflation is the Reserve Bank’s most significant concern, which means rate cuts – already forecast to occur later than expected – could be pushed out further.

Impact on the Australian Economy

In early trading, the markets were running for the exits. The dollar fell, the ASX 200 dropped, as did gold and copper.

As the day wore on, investors digested the possibility that the Chinese tariffs could have been much worse. Mr Trump had campaigned on tariffs as high as 60 per cent, so an additional ten didn’t seem so bad. Traders love a trader, and the market seemed to take the stance that a deal would be struck between the US and China on fentanyl, and many of the morning’s losses were retraced.

But this may be Trump’s opening gambit and no guarantee he won’t threaten larger sanctions if he doesn’t get his way.

Reserve Bank Governor Michele Bullock warned recently that “if China ends up badly affected by this, that badly affects us” with mineral exports in the crosshairs.

Deloitte Access Economics says a sagging iron ore price is one of the key reasons Treasurer Jim Chalmers will deliver the second largest swing from surplus to deficit in the country’s history, when he announces the Mid Year Economic Outlook next month.

Confirmation that China will be hit with tariffs couldn’t have come at a worse time for Labor as it casts around for some good economic news.

The $140 billion question (the value of company tax receipts to budget revenue) is how China responds.

So far, the recent stimulus program implemented by the People’s Bank of China has done more to support local governments than get China’s slowing economy moving.

This extra 10 per cent might not be enough to trigger a larger stimulus deal, which traditionally has funded infrastructure projects supportive of the iron ore price.

It leaves the country in an unfortunate holding pattern: waiting to see how quickly inflationary policies in the US flow through to our economy, and watching how China will respond to tariffs.

Alternatively, we have front row seats to a global negotiation that will form the basis of the revised edition of The Art of the Deal.