CBA expert warns US President-elect Donald Trump tariff promise could have ripple effect on Aussie economy

The Australian economy will likely survive the first round of strict tariffs imposed by US President-elect Donald Trump, but all eyes will be on how China responds to his proposal, experts warn.

Commonwealth Bank of Australia senior economist Belinda Allen said global economists forecast the Trump presidency will herald larger US budget deficits, higher US inflation and more volatile economic growth.

Ms Allen said Trump’s proposed tariffs will only have limited impact on the Australian economy because policy does not operate in a vacuum.

“The impact will be dependent on how other countries react to the imposition of tariffs and any offsetting policies implemented through monetary and fiscal policy,” she said.

“Currencies also provide a buffer. These responses create additional uncertainty of the impact.

“Uncertainty for financial markets, economies and consumers have lifted and will remain elevated in the next few years.

“(This) can have an economic consequence too and can lead to heightened volatility in financial markets.”

The US is Australia’s fifth largest export partner, with other services, professional, technology and other business services and tourism topping the list.

Beef is the largest goods export to the US after Australia exported $AU2.6bn of beef to the states in 2023.

Ms Allen said it’s not all bad news when it comes to the Australian economy as any tariffs placed on Aussie goods, like beef, would lift prices for US consumers.

Ms Allen said Australia will be feel the blow back China experiences if the President-elect Trump follows through on his election promise to introduce tariffs of up to 60 per cent on imports from China.

“A 60 per cent US tariff on all imports from China, all else equal, would lead to a slowdown in China’s economy growth,” Ms Allen said

“As a reminder, economic growth in China has already underwhelmed in 2024.

“Most economists expect China will miss its 5 per cent economic growth target.

“A slowdown in China would also likely have a negative effect on commodity prices because of China’s out-size influence on commodity markets.

“Lower commodity prices would arguably have the most direct link to Australia.

“A fall in commodity prices, particularly iron ore, would lower Australia’s terms of trade and lead to less export income. government revenue and corporate profits.”

Schroders head of Australian equities, Martin Conlon, said Australia’s reliance on China could ultimately be another risk factor that would impact the local economy.

“Subdued sentiment on China and poor affordability and economics in housing construction are creating the preconditions for depressed multiples for Australian shares and jeopardising future returns,” Mr Conlon said.

“In an environment in which investors become ever more attuned to chasing popular themes at incredibly rich valuations, it is perhaps understandable that most investors are happier running with the crowd than feeling lonely.

“However, there can be no hiding from China’s importance as a demand source for Australia’s exports, but as a production rather than consumption-led economy, economic weakness is usually met through stimulating additional production.

“Without incremental domestic demand to absorb this production, China is increasingly becoming an intermediary between raw materials and export markets.”

Ms Allen said a flexible exchange rate could also be Australia’s saving grace when it comes the impact of tariffs.

“The Australian dollar has already depreciated,” she said.

“A lower Australian dollar helps to protect Australian export businesses.

“The fall in the Australian dollar has been smaller than after President Trump’s first win in 2016.

“However, the decline in the Australian dollar has been larger against the USD compared to the Trade Weighted Index.

“We expect the main impact on Australia would be through lower national income if there is a material slowdown in China.”