The Republicans’ return to the White House could lead to fluctuating commodity prices, exchange rate instability, unpredictable investment flows and a reduction of Australian exports, according to leading economists, but it is too early to tell if it will be better or worse.
Experts who spoke to Central News said an escalation of the US’s trade war with China could hurt Australian exports, particularly wine, beef, lobsters and tourism, which had already been hit hard.
President-elect Donald Trump’s policy proposals on tariffs, tax cuts, and increased influence over the Federal Reserve, while having broad-reaching implications for both Australia and the global economy, could hasten the decline of US influence in the region.
However, conversely, they said it could also have benefits for Australia, including a stronger trade relationship with China, already the country’s biggest trade partner.
Donald Trump was elected the 47th President of the United States on Wednesday, marking a historic return to the White House as the first politician in over 120 years, after Grover Cleveland, to serve a non-consecutive term.
Trade and tariffs
Professor Tim Harcourt, chief economist at the Institute for Public Policy and Governance of the University of Technology Sydney (UTS), said Trump’s re-election could impact Australia, particularly in terms of tariffs and China relations.
“If Trump renews his promise to impose across-the-board tariffs, this will harm Australian exporters directly and has the potential for a global trade war,” Professor Harcourt explained to Central News.
Dr Michael Green, a professor and chief executive of the United States Studies Centre at the University of Sydney, expressed similar concerns.
“There is understandable trepidation about Trump’s love of tariffs,” Dr Green said. “He has promised 60 per cent tariffs on China and 20 per cent on everybody else. That would dampen China’s economic growth and hurt Australian exports, as would the protectionist barriers that would come up in a global race to the bottom on tariffs and counter-tariffs.”
Trump has proposed tariffs of 10 to 20 per cent on all imports, with his exact figures varying, and a 60 per cent tariff specifically on Chinese imports. Such measures could adversely impact Australian exporters, particularly those integrated into global supply chains.
The last time Trump was in office, his administration launched a trade war against China in 2018, arguing Beijing was engaged in unfair trade practices, including intellectual property theft and forced technology transfers, leading to the imposition of tariffs aimed at protecting US industries and reducing the trade deficit. Many of those policies continued under the administration of Joe Biden, but an increase of broad tariffs could further disrupt international trade dynamics.
However, there is speculation the actual tariffs may be well below Trump’s rhetoric on the campaign trail. A Goldman Sachs report projected final tariffs might be lower than 60 per cent, estimating a 20 per cent tariff on China and no additional tariffs on Europe, Japan, or Australia.
China’s impact
Professor James Laurenceson, director of the UTS Australia-China Relations Institute, believes Australia’s direct exposure to US tariffs would be limited, with the primary impact coming from Australia’s trading relationship with China. He argues that Australia’s vulnerability lies more in China’s economic health, as China is Australia’s largest trading partner.
“Our major exposure is via China. We only sold goods worth A$21.5 billion to the US last year, less than 4 per cent of total exports. In contrast, we sold A$204.5 billion to China,” he said.
According to the Australian Bureau of Statistics (ABS), in the 2023-24 financial year, Australia’s exports to the US were valued at approximately A$33.6 billion, about 5 per cent of total exports, while exports to China were significantly higher at A$219 billion, representing 32.6 per cent of total exports.
Professor Harcourt said while Trump’s hard line on China could pose challenges, China’s current economic struggles may make it less confrontational this time around. He implies that Australia’s economic risk lies in China’s potential response to US pressure.
“Trump talks tough with China, which could affect Australia, but China has more domestic economic problems now than in 2016, so it may be less confrontational. Ironically, Trump prefers negotiation to confrontation and did not initiate military conflict in his first term as President.”
Professor Laurenceson warned escalating US-China tensions could slow China’s economic growth, affecting Australia’s exports.
“Trump’s mooted 60 per cent tariff on goods from China…these days exports to the US only account for 15 per cent of China’s total exports, and total exports have fallen to around 20 per cent of China’s GDP,” he said.
“Rather than iron ore, the greater worry for Australia is how a spiralling US-China trade war might further depress Chinese consumer confidence, which has never recovered from the harsh COVID lockdowns in 2022. That would be bad news for Australian wine, beef, lobsters and tourism.”
Professor Laurenceson also suggested that a prolonged US-China trade conflict and aggressive tariff policies could weaken American influence in the region, potentially encouraging closer ties between Australia and China to maintain regional stability.
“The US is launching a major attack on the rules-based trading system. That could open space for Australia and China to strengthen their cooperation.
“The longer-term strategic implications of Trump tariffs would only be to further hasten declining US influence in the region, and by default, strengthening China’s,” he added.
Dr Green said China and other countries could respond to US tariffs by targeting key American exports, such as soybeans, with their own tariffs. This would be a strategic move, often used by trading partners to hit industries that are politically significant for US leaders, applying pressure by hurting Trump’s voter base in agriculture-heavy states.
“You can be sure that China and others are already making targets for American soybean exporters and other constituencies to hit with their own retaliatory measures,” Dr Green said.
“When Trump withdrew from the Trans-Pacific Partnership and threatened to withdraw from the North American Free Trade Agreement (NAFTA) in 2017, farmers and ranchers suddenly panicked at the spectre of massive tariffs on their exports to key markets. Trump retreated and signed new deals with Japan, Mexico and Canada to avoid the damage.”
Dr Green previously noted in an interview with The Wall Street Journal that Trump’s trade policy in his first term had been a “huge headache” for allied countries, and the foreshadowing of more tariffs would likely sow further division.
Inflation
An estimated $US515 billion ($783 billion) Inflation Reduction Act, introduced by the Biden administration, includes significant investments in clean energy and manufacturing, which critics say could disadvantage Australian industries by drawing investments to the US. If Trump were to repeal or alter this Act, it might reduce competitive pressures on Australian industry.
“The American people just voted out the Democrats because they are unhappy about inflation – and a barrage of new tariffs would only make inflation worse,” Dr Green said, speaking to Central News.
And Professor Harcourt added: “Trump may unwind the Inflation Reduction Act of the Biden administration that was crowding out Australian industrial policy. That may be a positive.”
Currency and tax
Dr Jianxin Wang, an associate professor in finance at UTS Business School, said potential currency fluctuations and financial market volatility, could affect Australian exports.
He told Central News: “Trump wants to exercise greater influence on the Federal Reserve, with the aim of reducing interest rates. This is likely to make the US Dollar (USD) weaker and the Australian Dollar (AUD) stronger, further reducing Australia’s exports.”
A stronger AUD would make Australian exports more expensive globally, reducing demand.
“Trump has indicated further tax cuts, as he did in 2018. This will further increase US government debt, which is already at $US35 trillion and over 120 per cent of US GDP,” Professor Wang warned.
“It will put upward pressure on the US interest rate to induce more investors to buy US treasury bonds. This, in turn, will increase the cost of capital and reduce physical and financial investments in the US.”
Stock markets
Some analysts claim global markets, including Australia’s, have experienced distinct negative performance trends under US Republican administrations in the past.
“Historically, the Australian stock market performs about 11 per cent lower under Republican presidencies in the US,” Professor Wang said.
However, attributing a specific percentage decline solely to the US political leadership and party policy remains challenging due to numerous influencing factors, such as global economic conditions, corporate earnings, investor sentiment and regulatory environment.
Dr Green noted the New York Stock Exchange saw record gains on the day after Trump was elected.
The Dow Jones Industrial Average rose by 1508.05 points, or 3.57 per cent, reaching 43,729.93. The S&P 500 increased by 146.28 points, or 2.3 per cent, to 5,929.04, while the Nasdaq Composite climbed 544.29 points, or 2.59 per cent, to 18,983.47. Bitcoin reached an all-time high, surpassing $US76,000, while the dollar headed for its largest single-day percentage increase since September 2022.
Market response immediately following election results often reflects investor optimism or concerns regarding anticipated policies. In this case, Trump’s victory spurred expectations of continuity in tax cuts, deregulation, and possibly moderate tariffs, aligning with previous trends where markets reacted positively to pro-business policies.
“Investors had three expectations about Trump,” Dr Green added. “That he would keep his original tax cuts after they are set to expire in February; deregulation would spur further growth; and Trump’s tariffs would actually not be so severe.”
Australia’s economy
Policy uncertainty or conflict from a Trump administration could increase volatility in US financial markets, according to Professor Wang.
“It will have a spillover effect, increase the cost of capital in Australia,” he said.
On trade policy, while Australia’s direct exports to the US are relatively modest, the broader implications of such tariffs could be substantial. China, Australia’s largest trading partner, may experience economic slowdowns due to these tariffs, potentially reducing its demand for Australian commodities. Additionally, global trade tensions could disrupt supply chains and market stability, adversely affecting Australian exporters.
Tax cuts could exacerbate the US federal deficit, potentially leading to higher interest rates as the government seeks to attract debt investors. Higher US interest rates may strengthen the US dollar, causing the Australian dollar to depreciate. While a weaker AUD might make exports more competitive, it could also raise import costs and inflationary pressures within Australia.
If the Federal Reserve reduces interest rates, the US dollar could weaken, potentially strengthening the Australian dollar. A stronger AUD may reduce the competitiveness of Australian exports, affecting sectors dependent on international markets. Moreover, deviations from traditional central bank independence could introduce volatility into global financial markets, impacting investor confidence and economic stability.
Increased policy uncertainty can lead to heightened volatility in global financial markets. For Australia, this could result in fluctuating commodity prices, exchange rate instability, and unpredictable investment flows. Such volatility complicates economic planning and may deter both domestic and foreign investment, potentially slowing economic growth.
Main image by Gage Skidmore/Flickr.
