Trump’s bark may be worse than his bite on trade

Donald Trump’s love of a deal is legendary, so don’t be surprised if the President-elect finds a compromise with China that averts a potential trade war. 

Trump’s proposal to impose 10 per cent tariffs on all goods imported into the U.S., and 60 per cent on imports from China, would have huge implications for global trade and for Australia as a major trading nation if sustained in the long run. 

However, there’s a good chance that economic realities will force the Trump administration into taking a more pragmatic approach, says Elliot Clarke, Head of International Economics at Westpac.

While tariffs might be imposed initially, Clarke points out that the U.S. is too reliant on some of the goods it imports from China to cut trade ties altogether. 

“A deal between the U.S. and China on trade can’t be ruled out,” Clarke says.

“At the end of the day, Trump wants to create jobs in the U.S. and reduce the deficit with China. One way to do that is to encourage Chinese firms to invest in manufacturing in the U.S. They are already doing so in Europe and across Asia, so there is precedent.”

If Trump does follow through on his tariff plans, China also has levers it can pull to mitigate the impact on its economy, Clarke says. For example, it can stimulate domestic demand as well as exporting more to the fast-growing economies of Asia.

Australia might also benefit if it receives some of China’s cheap manufactured goods that had been earmarked for the U.S., with a potential dampening effect on inflation here. 

In the short term, a period of volatility and uncertainty is likely, Clarke says, “but the net effect on trade across Asia from U.S. tariffs could largely be offset over time.”

A bigger concern for Australia is that tariffs, combined with Trump’s tax cut plans, will lead to higher inflation in the U.S., resulting in an earlier start to the Federal Reserve’s next rate hike cycle.   

“Fears over the U.S. deficit are also likely to hold market interest rates at elevated levels, and this will flow through to Australian market rates and financial conditions. Arguably this will be the biggest shock Australia has to work through,” Clarke says.

A higher-for-longer interest rate environment could curtail growth in household spending and residential construction, as well as crimping business investment. The Australian government may also face a higher cost of capital, limiting their ability to boost demand. 

There’s no doubt that Trump’s resounding victory, and the Republican “red wave” which will see the party control both houses on Capitol Hill, give him a strong mandate to enact his policy plans.

However, Clarke doesn’t expect it to be plain sailing.

“Trump and his administration will still be constrained by divergences in Republican opinion, budget realities, and time,” he notes. It’s also possible that the Republicans lose one or both of their majorities at the mid-term elections in two years’ time, potentially curtailing their window for action.

These realities may temper the more radical elements of Trump’s policy agenda. 

See also: Trump vs Harris: what it means for the Australian economy