Birmingham: key priorities for Australia under Trump tariffs

In response to President Trump’s March 12 application of tariffs on steel and aluminium I recently wrote that Australia should apply the old maxim of “don’t get angry, don’t get even, get ahead.”

“Getting ahead under such globally disruptive policies will be difficult, maybe impossible. But anger or retaliation will be even more detrimental. Australia’s response must be strategic and forward-looking.”

The challenge of applying such a disciplined response is even more formidable in the face of Trump’s huge so-called reciprocal tariffs, which have generated wild market gyrations, talk of global recession, and a new 10 per cent tax added to the cost of Australian goods entering the United States. In the face of such chaos, it is even more critical to keep a level head.

It is imperative that Australia applies responses to safeguard our economic and security circumstances overall, underpinned by three vital equities:

• Our investment and security relations with the United States
• Our trade relations with the world, and,
• The instrumental role of US engagement in the Asian region.

The US relations that matter

The US accounts for less than five per cent of Australian exports, less than China, Japan, South Korea and India. It matters, especially if you’re an Australian beef exporter, but we should keep in perspective how much it really matters overall.

In contrast, the United States has long been one of the most significant sources of foreign direct investment in Australia and continues to be our number one source of FDI. The US is also the number one destination for outbound Australian investment.

Through 2023, two-way investment between Australia and the US was valued at over AUD 1.8 trillion. This relationship is fundamental not just for capital inflows but also for technology transfer, innovation, and job creation. Two-way investment flows with the US are a far more critical pillar in Australia’s economic strength than our trade flows with the US.

Likewise, the security alliance between Australia and the United States has been a cornerstone of our foreign policy for decades. Leaders will be at pains to not allow disappointment over US tariffs to infect our close defence and security cooperation.

Arguably, Australia’s close relations with the US still paid some dividends in the Trump decision, as did our trade deficit with the US. Nobody got a lower tariff rate applied than Australia. To overreact to the 10 per cent levy would itself be an act of self-harm.

Australia’s defence and security leadership will rightly be working hard to ensure that our security relationship remains robust and unshaken. This means continuing to engage in joint military exercises, intelligence sharing, and diplomatic dialogues like the Quad that reinforce our mutual commitment to regional stability.

Rightly or wrongly President Trump and his key officials see these tariffs through the lens of bolstering American economic strength, especially in manufacturing and agriculture, as well as providing a revenue source to help fund income and company tax cuts. They seek this strength as a counter to China, which is precisely why they also still support the security relationship with Australia, including AUKUS.

This hard power military cooperation with the US, along with shared strategic interests, continues to provide Australia with opportunities to exercise influence that, over time, may open doors to mitigate the new tariff barriers.

Deepening trade with the world

While preserving our investment and security ties with the US is important, we should seize on renewed global concern about trade flows to prove the Trump administration wrong about its trade policies. Now is a time for Australia to lean into the rest of the global trading system and play an even greater leadership role.

Firstly, we must avoid reactionary measures. Although retaliatory tariffs might seem like a fitting immediate response, we can be thankful that both sides of politics in Australia are eschewing responses that could make a bad situation worse.

Secondly, we should pursue opportunities to broaden free trade networks with vigour. The political consensus in support of free trade in Australia exists because the evidence shows that our country has become more prosperous thanks to growing trade with the world, especially our region.

Opportunities to do so exist, for example, in not only using concerns with the US to strike previously elusive deals with the European Union or India, but also to broaden membership of multi-party agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Imagine the powerful symbolism along with economic benefits were both China and Taiwan to successfully progress through accession into the CPTPP.

There is also scope to look at what our existing trade agreements cover, not just who they are with. The Australia-Singapore Digital Economy Agreement provides an example of digital trade reforms that can streamline processes and reduce bureaucratic hurdles to trade. By digitising more trade documentation and customs procedures we can boost productivity and lower the costs to trade.

Finally, the World Trade Organisation may now be perceived as an entity for which the life support was just switched off, but a trade saving triple bypass could still be possible, and Australia should play a leading role.

The US may have abandoned all pretence of respect for the WTO but Australia has already worked with other partners to demonstrate how, even in the face of US disruption, we can work with a coalition of the willing to preserve a rules-based trading system.

The 2020 plurilateral agreement establishing the Multi-Party Interim Appeal Arbitration Arrangement as a workaround to US obstruction of traditional WTO dispute settlement mechanisms has been a success, even enabling resolution of three extremely sensitive WTO disputes between Australia and China. It is a model of cooperation that should be replicated to advance other negotiations and rules setting ambitions.

US leadership in Asia

Many of the considerations that matter to Australia, including those already outlined, also matter to many of our Asian and Pacific partners. Yet relative to Australia, they have been hit far harder by President Trump’s tariff decision.

The greatest disrupter to global markets and economies is the risk of tit-for-tat actions between the US and China. A 20 per cent tariff at March 4, having another 34 per cent added on April 2 and a further 50 per cent threated on April 7 demonstrates just how quickly and badly the trade war between the world’s two largest economies could spiral.

Compared with Australia, 24, 26 and 32 per cent tariffs respectively for Japan, South Korea and Taiwan are of far greater consequence for these north Asian economies who have higher levels of trade dependency on the United States.

For less prosperous but increasingly trade reliant south-east Asian countries like Vietnam, facing 46 per cent, Indonesia on 32 per cent, Thailand on 37 per cent or Cambodia on 49 per cent the impact could be profound.

Even more services oriented Pacific Island partners like Fiji, facing 32 per cent, will be aghast at the hit on their limited goods exports, especially as it comes alongside other cuts in development assistance in the region.

Alongside the overall shocks to the global economy, it is the impacts of US decisions on their relations with these partners that may prove to be the greatest consequence of these tariff decisions.

US leadership in the Asia Pacific has long been pivotal for maintaining a balance of power, investing in economic growth and, in some cases, promoting democratic values. For 30-40 years the combination of US security and US investment worked alongside China’s economic reforms to deliver life changing dividends to this region.

Rather than using too much of our capital in Washington seeking to reduce the 10 per cent tariffs applied to Australia, it is arguably of greater strategic interest for us to advocate for a reduction of the higher tariffs applied to regional partners such as Vietnam or Indonesia.

Australian interests are served by the US remaining engaged in our region, which logically requires it to remain welcome in our region. Unless the President is quickly encouraged to secure some of his much vaunted ‘deals’, Trump’s tariffs may see the welcome mat put out less often as these policies decrease both popular and political support for the US.

Conclusion

Getting ahead under such globally disruptive policies will be difficult, maybe impossible. But anger or retaliation will be even more detrimental. Australia’s response must be strategic and forward-looking. Protecting our key equities and focusing on our own productivity can keep Australia as a resilient and dynamic player in the global economy, ultimately proving that a collaborative approach is more beneficial than a destructive one.

Simon Birmingham is Head of Asia Pacific Engagement and Chairman, South Australia, ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.