Key Points:

• Barriers to trade – including through higher tariffs, export controls or subsidies to domestic producers – have been growing for a while and not just in the US. The recent pressure has come from concerns around (bilateral) trade deficits, manufacturing sector job loss, intellectual property theft and increasingly from national security concerns. So far, policies have generally been targeted.
• However, the upcoming US elections carry the prospect of a material increase in trade restrictions, particularly if Donald Trump returns to the Presidency. Trump has flagged tariffs on China of 60% or more as well as on imports from all other countries of 10-20%. (The implied average tariff rate is currently around 2½%).
• If the 2018-19 experience is a guide, when Trump did not increase tariffs to the extent flagged in his election campaign, the rhetoric may be somewhat ahead of the substance. But Trump defended his calls for higher tariffs in this month’s debate, saying “the tariff will be substantial.” The prospect of a material increase in trade tensions and restrictions is a risk to global growth.
• Ultimately, tariffs work against the more fundamental drivers of macro imbalances. A stronger USD would counteract at least part of the import-dampening effect of broad-based tariffs. That leaves the direct currency implications of a new trade tariff ‘war’ unambiguously USD positive, both in theory and likely in practice. That said, much of the USD’s appreciation in 2018 could be attributed to the Fed tightening cycle and Fed policy will therefore likely remain a major independent influence on the USD in 2025, even if a new trade tariff war ensues.
• For the AUD, downside risks stem from hits to global growth, associated ‘risk-off’ USD strength, weaker commodity demand and prices, as well as any material weakening in the RMB were this to form part of China’s response to increased tariffs on its exports.
• The range of plausible estimates for the impact on GDP and inflation is wide, but the direction is generally clearer – if the US materially raises tariffs, GDP would be lower both in the US and abroad. US inflation would be higher, but only temporarily unless expectations de-anchor. Ultimately, while cost-push inflation may temporarily slow easing, the broader cyclical backdrop will determine the path for central bank rate settings.

For more information, please see Thematic – The US election & the global trade in tariffs (September 2024)