JACKSON HEWETT: Even the RBA is worried as Donald Trump’s latest tariff push rattles global markets

Donald Trump continues to turn the tariff screws on the United States’ largest trading partners, prompting a broad-based sell-off in stocks around the world and a warning from the Reserve Bank.

Overnight, President Trump declared there was “no room left for Mexico or for Canada,” scuttling hopes that a trade détente could be reached. He also announced plans to double the previously planned 10 per cent levy on Chinese imports to 20 per cent, citing Beijing’s alleged failure to curb the flow of fentanyl into the US. Canada has responded with reciprocal tariffs on $US107billion ($172b) worth US goods, while China has responded with a tariff of up to 15 per cent on agricultural goods..

According to the Brookings Institution, a US think tank, a full-scale tariff war would reduce US output by $US75 billion in the short to medium term and cost up to 400,000 jobs.

Agriculture a new target

Australia’s farmers are now in the firing line. Trump turned to Truth Social to announce tariffs on imported food starting April 2.

“To the Great Farmers of the United States: Get ready to start making a lot of agricultural product to be sold INSIDE of the United States,” Trump wrote on Monday.

“Tariffs will go on external product on April 2nd. Have fun!”

That would severely impact Australian agriculture, which exported almost $7 billion in products to the US in 2023-24. Thirty per cent of Australia’s beef and sheep exports go to America, an export market worth more than $2 billion in 2024. Wheat farmers are also likely to suffer, with wheat futures down more than 5 per cent since February 18.

RBA sounds the alarm on global instability

The Reserve Bank of Australia is increasingly concerned. It devoted an entire section of its latest monetary policy minutes, released today, to the potential economic impact of global instability fuelled by Trump’s tariffs.

“Uncertainty about the global economic outlook remained high, given evolving developments in US government policies relating to trade, the fiscal position, deregulation, and immigration,” the minutes noted.

The RBA meeting, held on February 17 and 18, took place when tariffs on Canada and Mexico were on hold, prompting many to believe it was another of Trump’s negotiating tactics. With no fresh developments, the RBA decided to stick with its current global growth forecasts while flagging the risk of a global trade war.

“Members noted the potential for global trade tensions to escalate, in which case these forecasts could change quickly and significantly,” the RBA warned.

It now looks like those conditions are about to change — significantly.

Canada, China retaliate

Whatever Mr Trump’s negotiating tactic may be, it appears to be backfiring. His threats to Ukraine have pushed European allies closer together, while his tariff attack on Canada has forced Justin Trudeau to retaliate.Ottawa has responded with immediate 25 per cent tariffs on C$30b ($33b) worth of U.S. imports, and another C$125 billion ($139b) if Trump’s tariffs were still in place in 21 days.

Ottawa has responded with immediate 25 per cent tariffs on $C30 billion ($33b) worth of US imports, and another $C125b if Trump’s tariffs were still in place in 21 days.

China has warned it will take “all necessary countermeasures” to defend its economic interests — starting with targeting US agricultural exports.

Australia, with 20 per cent of GDP coming from exports, is particularly vulnerable. One-third of its exports go to China, and 80 per cent to Asia, making it highly exposed to instability in its most important markets.

The RBA is also closely watching China, noting that its recent economic uptick was “temporary”, driven by government subsidies and a rush to export goods ahead of anticipated US tariffs. With China facing sustained headwinds, the RBA expected any further growth to come from more stimulus.

At National Australia Bank, chief economist Alan Oster is increasingly factoring in geopolitical instability into his forecasts. While he does not expect serious direct effects from US tariffs, he believes Australia will feel the impact through China.

“Your number one trading partner might get really hurt as part of this process,” Mr Oster said.

“Then there’s what’s called trade diversion effects. For example, let’s say China and the US decide that, as part of their deals, the Chinese will take a lot more beef imports from the US, which means our market might get hurt.”

Global Inflation and global debt weigh

The risk of rising global inflation is also emerging. The RBA noted that tariffs “could potentially undo some of the progress on disinflation — particularly in the United States”.

One example of this inflationary effect is food prices. Eighty per cent of the potash used to fertilise US crops comes from Canada. That means as the US pushes up prices on food imports, it will also hit its own farmers with a 25 per cent rise in input costs.

It’s a stark example of the unintended consequences of Trump’s “America First” policy, one that will increasingly shape domestic economic policy.

The RBA is also watching rising sovereign debt levels, noting that the US, UK, and parts of Europe are seeing upward pressure on interest rates.

Australia’s interest rates are 80 per cent correlated to US bond yields, according to fund manager BlackRock. Any US rate hikes would put pressure on borrowing costs in Australia.

With President Trump’s tax cuts, increased defence spending in the UK and Europe, and rising geopolitical tensions over Ukraine, global debt levels are only expected to climb further.

Royal Bank of Canada economist Su-Lin Ong warns that global economic developments are becoming more critical to Australian policy settings.

“Global developments are set to become more important. Upcoming RBA speeches and Q&A will be increasingly viewed through this global prism,” she said.

RBA pre-emptively cuts rates, but risks remain

In concluding its decision to cut interest rates by 0.25 per cent, the RBA focused primarily on domestic, rather than international concerns.

A strong labour market — propped up by government spending — was not leading to higher wages, giving the bank confidence that inflation would remain under control. Meanwhile, a faster-than-expected fall in inflation gave it room to ease rates.

The Board saw further downside risks, including a slowing in government hiring, patchy consumer spending, and growing global instability.

They took the view that it was better to cut rates now than risk acting too late, while adopting a wait-and-see approach to further cuts.

That downside risk may grow now that the international economic landscape has shifted.

“Internationally, uncertainty about US government policy was high, and members noted that this could have a material adverse effect on the propensity of firms and possibly also households to spend. Activity in the Chinese economy was also expected to slow,” the RBA minutes noted.

The Trump effect is now rippling through to Australia. The question is, how much damage will it do?