Tag Archive for: Trade

In trade, nothing can replace the US consumer. Still, Asian countries look to each other

How will the US assault on trade affect geopolitical relations within Asia? Will nations turn to China and seek protection by trading with each other?

The happy snaps a week ago of the trade ministers of China, Japan and South Korea shaking each other’s hands over progress on a trilateral trade pact suggested that possibility.

The three, from nations with deep historic antipathy towards each other, said an agreement would create ‘a predicable trade and investment environment’, and they promised to speed negotiations.

There had been no discernible progress on the proposed trilateral deal since negotiations were launched in 2012. That this was the first ministerial meeting since 2019 points to the challenge ahead.

Asian nations have been active—some would say hyper-active—in pursuit of trade deals. The Asian Development Bank counts 77 preferential trade agreements among the nations of the Asia-Pacific region (including Australia) and a further 109 agreements signed with nations outside the region. Its research shows the agreements provide little help to export volumes.

About 56 percent of Asia-Pacific trade is within the region, which is only slightly less than the internal trade of the European Union. However, the intra-regional trade share has shown no growth since 2005 and has in fact slipped since 2020, despite the spread of trade deals.

Asian nations hit by US tariffs will certainly seek sales elsewhere. However, the first link in the supply chains that bind together enterprises across the region remains China’s subsidised manufacturers while the prize market remains the ravenous appetite of the US consumer.

There have been big changes in Asian trade patterns over the past decade. China has become more self-sufficient, particularly since 2018, when Donald Trump launched his first round of tariffs.

China’s President Xi Jinping responded in 2020 with his Dual Circulation Strategy, under which China would remain open to world markets but would seek economic self-reliance and import substitution in strategic sectors.

An analysis by Hinrich Foundation shows the success of this import-substitution drive. For every $100 of GDP growth over the past decade, China has had to import only $12.50 of goods and services, whereas in the decade to 2013, it needed $21.50 of imports for every $100 of GDP growth.

China’s imports are increasingly concentrated among a handful of countries, led by Russia, Vietnam, Brazil and Australia. Hinrich estimates that countries representing less than 10 percent of the global economy have supplied two thirds of China’s import growth over the last decade.

China sought, in particular, to become less dependent on the United States as both a market and as a supplier. The US share of China’s exports fell from 20 percent in 2018 to 12 percent last year, while the US share of China’s imports dropped from 8 percent to 6 percent.

While China’s direct trade with the US has fallen, its trade with Southeast Asia has increased. China’s share of Southeast Asian exports rose from 12 percent to 16 percent over the past decade, while its share of the region’s imports went from 16 percent to 24 percent.

Rather than exporting finished goods to the US, China is selling components to such countries as Vietnam, Cambodia and Malaysia, which then sell finished goods to the US.

The US has provided most of the growth for Southeast Asian exporters, with its share of their sales rising from 9 percent to 15 percent over the past decade.

There has been no growth in the US share of Southeast Asian imports, which has held steady at around 6 percent for most of the past 20 years.

The US has also become much more self-sufficient over the past decade as a result of the surge in its oil and gas production following the development of fracking technology.

However, US imports of manufactured goods have continued to rise. Estimates by Council on Foreign Relations fellow Brad Setser show the US trade deficit in manufactured goods has almost doubled since the 2008 global financial crisis to about 1.3 percent of global GDP.

In the same time, China’s manufacturing surplus has almost tripled to 1.7 percent of global GDP. Other Asian countries have become intermediaries in the flow of manufactured goods from China to the US but have not replaced it.

There is no other market like the US consumer. US household spending in 2023 reached $19 trillion, double the level of the European Union and almost three times that of China.

The huge imposts on US imports from China, Vietnam, Cambodia, Thailand and Indonesia will increase the cost and slow the flow of goods to US consumers, but there are no obvious markets to replace them.

Whether the tariffs act as the catalyst for the reindustrialisation of the US—an objective of both Republicans and Democrats—remains to be seen.

Trump’s tariffs: Australia’s worry is the effect on its trading partners

With the execution of global reciprocal tariffs, US President Donald Trump has issued his ‘declaration of economic independence for America’. The immediate direct effect on the Australian economy will likely be small, with more risk from the confluence of tariffs on its key trading partners. But the global effects of the United States’ tariff regime will extend beyond the economic effects, with implications for America’s reputation as a trusted and reliable partner. All the while, China stands ready to fill the gap.

With Trump’s latest executive order, from midnight on 3 April the US will impose far-reaching tariffs on other countries to compensate for the alleged combined impact of foreign countries’ tariffs and non-tariff barriers on US exports. Emphasising the ‘fairness’ of the approach in a White House Rose Garden address on 2 April, Trump said the reciprocal tariffs of up to 50 percent equated to just half of the trade measures levied by those countries against America. These were complemented by a baseline tariff of 10 percent on goods from every country—except for Canada and Mexico, which are already subject to tariffs of 25 percent. The 10 percent would not be added to goods already subject to tariffs, such as semiconductors, steel and aluminium.

The 10 percent levied against Australian goods exports to the US will likely have a minimal impact on Australia’s economy, despite being estimated to constitute a direct cost the Australian industry of US$1.6 billion. Speaking to the media after the tariff announcement, Prime Minister Anthony Albanese said the tariffs were unwarranted and ‘not the act of a friend’. But he also sought to reassure, noting the exports constituted less than 5 percent (US$16.6 billion) of Australian goods exports. By comparison, more than 30 percent of Australia’s exports are sold to China.

Australia provides duty free access to US imports under the 2005 Australia-US Free Trade Agreement. However, the Trump administration’s concern with Australia is likely with what it considers non-tariff barriers as outlined in the findings of the USTR report on Foreign Trade Barriers (PDF), of 1 April. The report details several longstanding US concerns with Australian biosecurity regulations on agricultural products (certain meat and fruit imports), issues with Australia’s policies on pharmaceuticals (which mandate a price for drugs under the Pharmaceutical Benefits Scheme) and payment for news content on social media. While it doesn’t mention Australia’s recent social media protections for children, this has also been raised by the US tech industry as a non-trade barrier.

The 10 percent tariff scenario will impose short-term direct costs on Australian industry. Most affected will likely be Australian beef and other meat products, exports of which to the US were worth US$4 billion in 2024 and accounted for more than a quarter of US imports of foreign beef. The US has been Australia’s largest market for beef in recent years. Despite having a large beef industry, the US relies on certain imported beef products. This could give a degree of leverage as Canberra progresses long running negotiations with Washington on the issue. Albanese has ruled out any compromise on other US concerns, in particular social media protections and the Pharmaceutical Benefits Scheme.

Australia’s trade-exposed economy will be more vulnerable to second and third order effects as some of Australia’s key trade partners respond to these new tariffs. While tit-for-tat tariffs may depress the Australian economy, greater impact will likely come from regional partners adapting trade strategies and adjusting supply-chains to minimise their exposure, and from businesses delaying investment decisions due to uncertainty around US and other governments’ policies.

Four of Australia’s top five trading partners, accounting for 44.3 percent of Australia’s two-way trade in 2023–24, are subject to higher US tariffs: China (a 34 percent tariff), Japan (24 percent), South Korea (26 percent) and India (27 percent). Developing or emerging economies, such as Vietnam (46 percent) and Indonesia (32 percent), will likely find it harder to absorb the effect of tariffs, due to their reliance on export-driven growth and deep integration in global manufacturing supply chains. The resumption on 2 April of exclusion of goods from China and Hong Kong from duty-free de minimis treatment will be an additional hit to the Chinese economy.

The Indo-Pacific is home to most of the world’s people. It accounts for 60 percent of global GDP and two-thirds of global economic growth. Since former president Barack Obama’s much vaunted Pivot to Asia from 2011, the US has sought to focus more strongly on the region for strategic and economic reasons. Despite some efforts such as the Indo-Pacific Economic Framework, US protectionism has hampered meaningful progress on US trade with the region. By comparison, China is likely the top trading partner for most countries in the world, particularly in Asia. As China actively competes with the US for influence with these countries, steep US tariffs on their exports may cause them to orientate away from the US market, deepening this trend. Tariffs will undermine US efforts to establish itself as a preferred partner in the Indo-Pacific region while providing China with ammunition to support its claims of American self-interest and unreliability.

This article has been corrected in several places. It now says the direct cost to Australian industry from Trump’s tariff on Australia is estimated at US$1.6 billion, that it will likely have minimal economic impact, that the administration’s Australian concern is likely with what it sees as non-tariff barriers, that Australian pharmaceutical price regulation applies not only to imported pharmaceuticals, and that the tariff on India is 27 percent.

Open Australia versus closed United States

Beyond trade and tariff turmoil, Donald Trump pushes at the three core elements of Australia’s international policy: the US alliance, the region and multilateralism.

What Kevin Rudd called the ‘three fundamental pillars’ are the heart of Australia’s foreign policy consensus.

Even Robert Menzies had versions of those pillars in his policy Parthenon. The consensus dates from the dark days of World War II, when the United States stepped up to perform the vital role Menzies defined as the ‘great and powerful friend’.

The eight-decade lineage means Australia is not about to give up on alliance, region and multilateralism as expressions of our interests, history and geography. But Trump alters Australia’s understanding of what the pillars can support.

The scope of region has grown from the South Pacific and East Asia to become the Asia-Pacific, and now the Indo-Pacific. The sorry state of the United Nations means multilateralism offers a rules-based order where rules rupture and order buckles. The US ‘is turning against the liberal international order that it once forged’, Chatham House argues, drawing on its research for the US National Intelligence Council.  The alliance has deep roots in the dire days of 1942 when Washington made General Douglas MacArthur commander in the Southwest Pacific, instructing him to repel the Asian invader and hold ‘the key military bases of Australia as bases for future offensive action’.

The treaty expression of the alliance, ANZUS, now in its eighth decade, rests on a promise to consult about military threats. Thus, while NATO is shocked to sense Trump-sized holes in the promise of automatic military response to attacks, Australia has always understood the contingent nature of ‘consult’, all that ANZUS actually compels the signatories to do in case of security threats. The embrace of the alliance totem by Menzies raises three implicit questions about any US administration: How great? How powerful? How friendly?

Trump has changed the politics of the alliance consensus in Australia’s election. Peter Dutton proclaims: ‘If I need to have a fight with Donald Trump or any other world leader to advance our nation’s interest, I’d do it in a heartbeat.’

Fight the US president in a heartbeat? Roll over, Bob Menzies. A Liberal leader breaks an unwritten rule of Australian politics that states that any party doubting the alliance is punished by voters.

Former Liberal prime minister Malcolm Turnbull offered a meditation on how Australia must recalibrate ‘to discuss how we can defend ourselves without America’, arguing that ‘Trump makes it very clear he is both a less reliable and a more demanding ally.’ 

Canberra wise owls such as Dennis Richardson recognise this less-reliable-more-demanding judgement of the US, while still embracing the alliance. Attempting that balance, Dutton offers to fight Trump while maintaining that the AUKUS submarine isn’t at risk, because both sides of US politics see its benefits.

Even the crown jewels of the alliance lose shine. The Economist surveyed Trump’s damage to ‘the world’s most powerful intelligence pact’, the Five Eyes signal intelligence partnership of the US, Britain, Australia, Canada and New Zealand, identifying three risks:

—The US will disrupt the arrangement, ‘perhaps acting on its threats to boot out Canada from the Five Eyes’;

—The allies will share less, fearing that ‘the Trump administration will be lax in protecting its secrets’; and

—The most likely scenario is that Trump’s war on the federal bureaucracy and politicisation of the intelligence community ‘will cause turmoil and paralysis among American spies that spill over onto allies’.

In the new reciprocal tariff schedule just released by Trump, Asia is the top target. Countries getting tariffs in the 40 percent range include Vietnam, Cambodia, Sri Lanka, Laos and Myanmar; those in the 30 percent range include China, Taiwan, Indonesia, Thailand and Bangladesh; those in the 20 percent range include Japan, South Korea, India, Malaysia and Pakistan.

As Trump imposes tariffs to shut out the world, Australia could show the Indo-Pacific how open it is by killing the last of its tariffs, completing our trek from being a highly protected economy to one of the most open in the world. Australia’s remaining tariffs range from 3 to 5 percent. We could quickly go to zero. Bryan Clark of the Australian Centre for International Trade and Investment says: ‘Abolishing tariffs would lower prices for consumers, reduce business costs and simplify supply chains, boosting resilience in a disrupted global market.’

Zero tariffs would be an emphatic response to an autarkic US and a practical invitation to the rest of the Indo-Pacific. Australia would answer bad policy with good policy—open Australia versus closed US.

Eggs in more baskets: protecting Australian agricultural exports from US tariffs

Australia’s export-oriented industries, particularly agriculture, need to diversify their markets, with a focus on Southeast Asia. This could strengthen economic security and resilience while deepening regional relationships.

The Trump administration’s decision to impose tariffs on Australian steel and aluminium has caused doubts about the strength of the relationship between Australia and the United States. While the US has not yet imposed tariffs on Australian beef and other agricultural products, the current unpredictability of US trade policies means these industries could soon be on the chopping block. This would harm Australian primary producers and have significant social effects on rural communities, including in the strategically important north.

The rumblings of a shifting world order are impossible to ignore. We cannot pretend that the post-Cold War order, in part defined by the US’s championing of trade liberalisation, is still healthy and intact. Middle powers, perhaps the chief beneficiaries of the rules-based order, bear a particular responsibility and capacity to preserving it. The shakeup of the global trade system may require us to re-evaluate our export posture; Australian governments and businesses must prepare for this.

Australia exports approximately 70 percent of the agricultural, fishery and forestry products it produces. The US is the second-largest market for Australian agricultural goods, taking $6.8 billion of them in 2023–24, with beef, lamb, dairy and wine among the most valuable. The loss of this market would deal a great blow to many agricultural businesses and communities across Australia.

These economic challenges are clear, but agricultural export tariffs would also have concerning social ramifications. Economic loss leads to disillusionment, unemployment and scapegoating, fuelling political and social discontent.

The development of northern Australia, vital for Australia’s strategic position and foreign policy, would be at particular risk if trade barriers curtailed agriculture—one of the region’s key economic engines and forces of community life.

Australia has recent experience in diversifying markets for our agricultural exports. In the face of trade barriers erected by the Chinese government beginning in 2020, Australian officials and agricultural industries did well to find other destinations for some affected products. Even when the Chinese market reopened, these other markets remained favourable.

Southeast Asian markets are particularly promising for a variety of reasons. One is that together they already buy more Australian agricultural products than the US does.

The region’s largely tropical climate makes it unsuitable for the kinds of products grown in Australia’s mediterranean, sub-tropical and semi-arid zones. Australian exports can play a more prominent role as Southeast Asia’s population rises and consumer preferences change, with both factors driving the demand for greater volume and diversity of food products, especially animal protein.

Furthermore, the US is also a significant agricultural exporter to the region. It shares six of its top 10 export markets with Australia, all in East and Southeast Asia. Should the Trump administration continue to impose tariffs, and should regional nations introduce reciprocal tariffs, Australia could fill some of the US-shaped holes.

South and Southeast Asia’s textile industries are also markets for Australian natural fibres such as cotton and wool. Currently, 60 percent of clothing is made with petrochemical fibres. But campaigns aimed at reducing this amount could drive global demand for natural fibres, benefitting Australian producers and the environment. Southeast Asia also presents a fantastic market for raw goods to be processed and exported, even back to Australia, due to moderate labour costs, lower utility costs and proximity to markets. This provides mutual economic and social benefits.

Other markets should also be considered. While Southeast Asia’s tropical produce is plentiful, New Zealand’s is not. Australia is the largest exporter of tropical fruits to New Zealand, but there is still room to grow this profile. This would particularly benefit northern Australia, where many tropical fruits are grown.

In East Asia, Australian high-quality agricultural products are particularly prized. Australia should boost agricultural-product promotion campaigns in the region, which are already quite creative.

Australia’s agricultural sector will continue to be important, yet vulnerable to trade insecurity. Through multilateral groups such as the Cairns Group and MIKTA—Mexico, Indonesia, South Korea, Turkey and Australia—Australia should continue to reinforce the benefits of open trade, while also being alert to the challenges it can create for communities large and small.

As we see in the US, serious public grievances arise when negative domestic effects of international trade aren’t addressed. Governments and civil society must manage economic transitions effectively and develop adequate supports during the process. This must be supported by responsible corporate governance, alive to the ethical effects of economic change.

Trump’s speech to Congress: America First in trade and alliances

In what might have been the longest presidential address to Congress in American history—an hour and forty minutes without intermission—President Donald Trump delivered a performance on Tuesday night that was simultaneously grandiose, confrontational, optimistic and revealing of the direction in which he intended to take his administration and his country.

It also received high marks from nearly seven in 10 Americans who watched it.

For Australian observers, the annual address, as expected at such spectacles, offered few specifics but did provide insights into how the United States’ role in the world is evolving. It’s a transformation with implications for the Indo-Pacific and allies’ strategic calculations.

Electoral politics is theatrical by nature, but Trump has elevated the art well beyond the standards of the campaign season and his first term in office. His address to Congress displayed all the elements of classic political theatre: the heroes (Trump himself, and the various ‘everyday Americans’ whose stories he highlighted), the villains (the Democratic opposition, sitting glumly throughout), and the dramatic narrative arc of national redemption

‘America is back,’ Trump declared in the opening moments, setting the tone for what would be a celebration of his administration’s accomplishments and a vision of US restoration.

The president’s embrace of tariffs signals a fundamental shift in American economic policy that will reverberate throughout global supply chains.

‘On April 2nd reciprocal tariffs kick in,’ Trump announced, explaining his philosophy: ‘whatever they tariff us, other countries, we will tariff them.’ This principle of reciprocity was framed not as protectionism but as fairness. ‘We will take in trillions and trillions of dollars and create jobs like we have never seen before,’ he added.

Trump’s economic vision represents a rejection of the post-Cold War neoliberal consensus that has dominated Western economic thinking. In its place stands a muscular economic nationalism that prioritises American manufacturing, energy production and job creation above abstract principles of free trade. Australia, with its robust trade relationships with both the US and China, will need to navigate carefully across this evolving landscape.

The president’s emphasis on US energy dominance further underscores this nationalist approach. By declaring a ‘national energy emergency’ and authorising expanded fossil fuel production as part of an all-energy policy, Trump is signaling a reversal of policies that is sure to rile many Americans and Australians.

Perhaps most consequential for Australia’s strategic position was Trump’s articulation of his foreign policy vision, which represents a break from both Republican neocons and Democratic liberal interventionism.

His approach blends two different veins of American foreign policy thinking identified by Walter Russell Mead. The president taps Hamiltonian elements, such as economic strength as power, national security linked to economic strength, and alliances between government and business. He talks about making the world safe for American business.

Trump also exhibits a Jacksonian streak—sceptical of foreign entanglements, preferring a restrained military but willing to exercise overwhelming force when US interests are directly threatened, and insisting on putting America—and rank-and-file Americans—first.

On Ukraine, Trump revealed he had received a letter from President Zelenskyy stating that ‘Ukraine is ready to come to the negotiating table as soon as possible to bring lasting peace closer.’ This announcement, coupled with Trump’s assertion that he had also had ‘serious discussion with Russia,’ simply repeated his determination to end the conflict rapidly.

‘It’s time to stop this madness,’ Trump declared. ‘It’s time to halt the killing. It’s time to end this senseless war.’ For Australia, which has supported Ukraine diplomatically and materially, this pivot represents a challenge. Canberra can get on the peace train now or decline to align with its chief security provider with the hopes that Trump won’t see Australia as an obstacle to ending the fighting and that prolonging the war may, perhaps, result in some future better outcome for Kiev.

Similarly, Trump’s approach to the Middle East suggests a willingness to allow Israel greater freedom of action while the US simultaneously works to end the conflict in Gaza. ‘Iran, of course, is at the nexus of Middle Eastern tensions,’ Trump said, suggesting a harder line against Tehran than his predecessor’s administration.

The president’s announcements regarding the Panama Canal (‘We are taking it back’) and Greenland (‘We need Greenland for national security’) are classic Trumpian figurative language but also reveal his policy of hemispheric prioritisation.

Perhaps most striking was the evidence of how Trump has transformed the Republican Party. His speech revealed a party no longer defined by free-market orthodoxy, limited government and interventionist foreign policy but instead by economic nationalism, cultural conservatism and a focus on working-class interests. Trump concluded his speech thus: ‘Every single day we will stand up and we will fight, fight, fight for the country our citizens believe in and for the country our people deserve.’

‘The Republican Party is now the party of peace,’ Trump declared, cementing his break with Republican primacists—those who are committed to US global dominance. His criticism of endless wars, coupled with his emphasis on border security and economic protectionism, represents realignment of American politics with Pacific implications. The US, after all, is a Pacific power and, among many things, a Pacific island state.

Trump’s address is just another signal of shifts that Australians have seen coming. First, his emphasis on America First economic policies suggests potential trade tensions, even with allies. Australia’s export economy may suffer from reciprocal tariffs and Trump’s focus on American manufacturing.

Second, Trump’s scepticism of legacy alliances and international institutions—whose value and utility he measures against contemporary US interests—may create uncertainty in the regional security architecture that Australia has relied on. While Trump did not specifically or directly address the Indo-Pacific or China in this speech, his America First theme should remind Australia to demonstrate its value to the alliance more explicitly.

Finally, Trump’s populist realignment of US politics mirrors a broader shift in Western democracies that may yet influence Australian politics. The success of his economic- nationalist and cultural messaging offers a template for Australian politicians.

Australians, watching this political theatre from afar, would do well to remember that this is also reality. Structural demands for change in the global order will remain on stage long after the applause for Trump fades.

When dealing with China, Australia must prioritise security over economics

China’s economic importance cannot be allowed to supersede all other Australian interests.

For the past couple of decades, trade has dominated Australia’s relations with China. This cannot continue. Australia needs to prioritise its security interests when dealing with Beijing, and it shouldn’t overestimate or overstate its vulnerability to China’s coercive trade practices.

Prioritising security is particularly important as we confront escalating global competition and China’s increasingly assertive behaviour. China’s live-fire exercises in the Tasman Sea have once again brought attention to the growing threat of aggressive Chinese military actions in the Indo-Pacific.

The exercises were conducted in international waters and violated no international law. But the behaviour broke norms and was less than ideal: usually, such exercises are preceded by adequate early warning to affected countries. In this case, neither Australia nor New Zealand was informed, and early reports suggest that passenger aircraft that were already enroute were forced to reroute because of the exercises. This is unacceptable international behaviour, and the Australian government should not be shy in saying so.

Australia has been more than accommodating of China. In response to press questions on live-fire exercises, Prime Minister Anthony Albanese said China ‘could have given notice but Australia has a presence from time to time in the South China Sea’. This framing was unwise, to say the least. Albanese no doubt wishes to avoid escalation, but it is unnecessary to provide such false equivalence, which Beijing could exploit. The comment offers China a free pass.

Economic issues are important for political leaders, especially in democracies, where everyday issues take precedence even over discussions about national security. This is probably why Albanese highlighted the government’s success in boosting trade and addressing disputes with Beijing—even though many of these disputes were of China’s doing, rather than Australia’s.

But Australian leaders should also recognise that China is not simply doing us a favour by trading with us. It benefits from the goods and services that Australia offers and the revenue from what it sells. This is a mutually beneficial relationship, and disruptions will affect China too.

While China may be able to source its mineral and other resources from other parts of the world, Australia can similarly find other markets for its resources, as it has in response to previous Chinese trade obstruction. China buys from Australia for a variety of reasons, including price, quality and the predictability of supply. These are not values it can get from anywhere. In many countries, resources are in conflict zones that are difficult to access.

Any trade disruption would likely hurt Australia more than it would hurt China, but it would still damage China’s economy. There is a reason why previous trade punishments have targeted a few niche products, such as wine. China has not targeted critical items, such as mineral resources, precisely because it knows that its own economy would face difficulties if it did so. As China’s economy slows, the cost of transitioning away from Australian goods and services rises.

China has repeatedly used trade sanctions against smaller economies—such as Norway, Canada, Sweden and Mongolia—for perceived slights and other political reasons. But it has never really benefited from doing so, instead gaining a reputation as a bad and unreliable actor. Its trade threats in the past few years have been more bark than bite, with most targeted countries, including Australia, standing their ground and China eventually backing off.

While Australia should not pursue trade confrontation, it may be similarly unwise to emphasise or exaggerate its vulnerability, as this will only invite pressure. Rather, Australia should initiate talks with its European and Indo-Pacific partners, as well as the US, to present a united front against such threats.

China can make threats and apply sanctions only against countries with smaller economies, and only because it thinks they will have to face such sanctions alone. Even if sanctions are ineffective—as indeed they have been—we cannot let China assume that it can get away with such behaviour without consequences. A united response to China’s trade bullying is needed to deter and, if deterrence fails, punish China for such aggressive actions.

Political leaders in democracies no doubt have a hard time balancing economic and security requirements in foreign policy. But they should avoid over-emphasising trade and economic factors—Beijing will assume these are pressure points when leaders talk as if they are. Australia must instead emphasise that it will not bend to such tactics.

ASPI USA roundtable: Trying to understand US economic statecraft

Governments are outraged, industry leaders are keeping a low profile, and economists and analysts are confused as they work to understand how the Trump administration’s approach can make the United States simultaneously safer, stronger and more prosperous.

In its first month, the Trump administration has shaken up the world trading system as it uses tariffs to try to promote US investment, productivity, industrial and technological advantage; defend US economic and national security; and help US workers.

An ASPI USA discussion with Claire Chu, Aaron Glasserman, Kimberly Donovan, Phil Rogers and William Alan Reinsch this month focused on what this approach means for US-China relations. This is the first in ASPI USA’s series of Chatham House roundtables to consider the Trump administration’s approach to geoeconomics.

The administration has imposed a 10 percent general tariff on Chinese imports, adding to economic measures established under the previous Trump and Biden administrations.

It has threatened to impose 25 percent tariffs on aluminium and steel not made in North America, reciprocal tariffs on all countries, 25 percent tariffs on automobile imports, and tariffs of at least 25 percent on pharmaceuticals and semiconductors. The US will also place 25 percent tariffs on imports from Mexico and Canada, unless these countries can further appease Trump. This is all before considering retaliatory tariffs levied on the US.

If a country adds a tariff to protect an industry, it does so by making foreign goods more expensive and domestic goods relatively more attractive. If the protected local companies then enjoy a larger market, they may expand their workforces.

But tariffs could also lead to job losses in non-protected industries. When companies pay more for imported inputs, they may pass on the higher cost to consumers. They may shrink their workforces, too. Costs would rise for US imports with no domestic alternative, affecting businesses downstream. For example, placing a tariff on coffee would increase prices for cafes. This might then affect bakeries that supply the cafes, as some consumers decide not to buy coffee.

The administration wants businesses to invest in domestic manufacturing, but this will take time. Tariffs and export controls, together with incentives, have led to reduced US investment into China, with some returning to the US. However, Donald Trump has questioned the value of mechanisms incentivising business to relocate. He suggested he might abolish the CHIPS and Science Act, a law that provides funds and incentives for semiconductor research and production in the US. He has also paused disbursement of grants under the Inflation Reduction Act, which seeks to do the same with renewable energy.

Broad tariffs increase production costs, which in turn inflate consumer prices. They also undermine US export competitiveness by increasing production costs and strengthening the dollar, leading to inflation and fewer jobs in the short to medium term.

The US must also consider how applying tariffs on allies and partners will affect its reputation. Imposing tariffs on any country the US perceives as having an unfair trade deficit, including when this is for a single sector within a broader trade surplus (for example, aluminium from Australia), signals a shift toward purely transactional economic relationships.

An apparent US disregard for decades of strategic and security cooperation will erode trust in US leadership, particularly among allies. This will reduce its ability to rally international partners for broader strategic objectives.

The proposed tariffs might also affect the US’s ability to counter China in the Indo-Pacific, particularly regarding Taiwan. Tariffs on Taiwanese goods, targeting its world-leading semiconductor industry, could impact Taipei’s calculus about whether its alignment with the US is in its best interest.

US tariffs could also affect Taiwanese public opinion, influencing voters to reconsider the viability of self-determination and strategic alignment with the US. This would be a gift to China as it works to lure Taiwan to unite with it.

The loss of Taiwan would undermine US national security; isolate key US allies and trade partners; make the 80 percent of global trade that passes by Taiwan and the South China Sea vulnerable to Chinese manipulation; and reduce US commercial access to 60 percent of global GDP.

Further, the Trump administration’s use of economic measures to elicit political outcomes—such as against Mexico to get action on the southern border or Columbia on illegal migrants—undermines its ability to call China out when it does the same.

Campaigning for election, Trump and his supporters boiled his trade proposals down to creating jobs and lowering prices, which would make the country safer, stronger and more prosperous. If the above principles of economics stand, then we must ask why the administration is using tariffs in contradictory ways.

At the roundtable, some experts pointed to Trump’s long-held view that allies and adversaries had taken advantage of the US for decades on trade and security. Others noted that with the national debt at more than US$36 trillion and still climbing, Republicans were willing to back Trump’s deal-making skills to lift revenue and get more favourable trade and political outcomes. While Elon Musk’s effect on trade policy was unclear, maybe the tariff on China being set at 10 percent instead of the foreshadowed 60 percent was because of his investment in the country.

At this stage, it is hard to see a strategy behind the tactics being employed.

Securing Australia’s interests in a Trumpian trade world

Australia must adopt a sophisticated and multi-layered strategy to engage the second Trump administration on trade and security. Australia must frame its trade relationship with the US in terms of its direct contribution to US national security and job creation.

Donald Trump’s second presidency, not yet 100 days old, is already sending shockwaves across the global trade. Australia’s economic and national security and the future of Indo-Pacific security architecture depend on navigating an unpredictable trade landscape. Understanding the new administration’s trade policies and their link to broader security considerations is essential for Australia’s economic prosperity and broader national interests.

The previous Trump administration made clear its perception that many countries were taking advantage of the United States. This concern became a guiding strategic principle, extending beyond trade imbalances to encompass security burden-sharing. Australia has long been a good trade and security partner to the US, and it navigated the first Trump administration with aplomb. While our trade surplus played a role, it was not the decisive factor.

Two elements underpinned Australia’s success. First was Australia’s commitment to defence spending, as evidenced by the 2016 Defence White Paper and its pledge to meet a target of 2 percent of GDP. Second was Australia’s increasingly assertive stance towards China, even at the risk of short-term economic pain. Willingness to prioritise security over immediate economic gain earned Australia considerable respect within the administration.

Australia’s current strategic settings may fall short of the Trump administration’s expectations. While the AUKUS partnership bolsters Australia’s defence credentials, a closer examination of defence spending beyond this high-profile initiative reveals vulnerabilities. Moreover, there is a perception that Australia’s China policy has softened, potentially undermining its standing with the new administration.

Assuring the administration of Australia’s support for the US’s national security and economy requires highlighting sectors where US-Australia economic cooperation directly enhances US defence capabilities. In addition to Australia’s $3 billion investment in expansion of US shipyards, Australian industry and manufacturing has been deeply embedded in the US defence supply chain for many decades.

For instance, as part of a memorandum of understanding with the US, Australia has long supplied parts for F-35 fighters assembled in Texas and bought by Australia. Australian defence firms collaborate with US contractors, providing important components and technology for submarines, warships and cybersecurity solutions. Australia and the US are also deepening critical-minerals cooperation for US military and aerospace applications, including cobalt and lithium for defence-related battery technologies.

This framing must extend beyond specific sectors to encompass the broader alignment between the two countries. Australia’s unwavering commitment to a free and open Indo-Pacific, its willingness to confront Chinese assertiveness and its active participation in regional security initiatives, such as the Quad, contribute to a secure and stable environment conducive to US interests.

While the US may favour bilateral trade arrangements and a tiered system prioritising democratic economies, Australia must continue championing the existing rules-based international trading system. Australia is the 2025 chair of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership Commission, whose member states accounts for about 14 percent of global GDP. Canberra thereby has a unique opportunity to coordinate action on US tariffs in the group and reaffirm member states’ commitment to free and open trade. Australia is likely to find strong support for this initiative, particularly as members Canada and Mexico face complicated trade disputes with the US.

Australia should use its membership in the Regional Comprehensive Economic Partnership, noting sensitivities with Chinese membership, and engage with European partners through the World Trade Organization to maintain a diversified trade portfolio.

Maintaining close ties with the US administration and avoiding escalatory trade disputes is paramount. With US$77 billion in two-way trade and bilateral investment stock valued at US$1.6 trillion, Australia must emphasise the mutual benefits of the economic relationship and the potential damage that protectionist measures could inflict on both countries.

This engagement will require an understanding of the administration’s priorities and concerns. Australia must communicate its value as a strategic and economic partner, underpinned by a mutually beneficial bilateral free trade agreement and shared history. In Trumpian terms, Australia must be clear that it is no economic or security freeloader; its global influence is due to real expenditure of time, effort and resources at a level well above that expected of a middle power.

While maintaining strong ties with the US is essential, Australia must also enhance its domestic economic resilience and diversify its trade partnerships. This approach should include investing in innovation, developing new industries and strengthening ties with regional partners. Such measures will reduce Australia’s vulnerability to external shocks and enhance its strategic autonomy.

By addressing the new administration’s concerns and demonstrating its value as a reliable ally and economic partner, Australia can secure its interests and navigate the challenges of a Trumpian trade world.

Trump’s trade war is about more than trade

The opening salvos of US President Donald Trump’s trade war have sent shockwaves around the world. Over the past three weeks, his administration has broken with decades of free-trade orthodoxy, threatening to impose tariffs not only on strategic adversaries such as China but also on longstanding allies such as Canada and Mexico. Even Denmark—a NATO member and steadfast US ally during and after the Cold War—has found itself in Trump’s crosshairs.

Trump’s actions have made many in the United States and around the world wonder: what exactly are tariffs, and how do they affect global trade? Simply put, tariffs are taxes on imported goods. If a Chinese manufacturer wants to sell shoes in the US, the American government can impose a tariff. If a US retailer pays $100 for a pair, then a 10 percent tariff, like the one that Trump recently imposed on goods from China, means that the retailer must pay the US government $10.

Those $100 shoes now cost $110. Who pays the extra $10? When Trump raised tariffs on Chinese imports during his first term, US importers bore most of the cost, particularly when they could not find alternative suppliers. Consequently, retail prices remained relatively stable, at least in the first year.

But the picture becomes more complicated when tariffs remain in place for an extended period. US importers cannot absorb the added costs indefinitely and may go out of business unless they find new suppliers or pass those costs to consumers, who may then need to cut back on spending.

When one country uses tariffs or other sanctions to damage another country’s economy, the result is often retaliation and trade war. China, for example, responded to Trump’s tariffs by imposing its own tariffs on US imports. Yet, although Chinese and US tariffs are based on similar reasoning, their impact will not necessarily be the same.

During the first US-China trade war, most of the burden of China’s retaliatory tariffs was borne by American exporters rather than Chinese importers. This was because China quickly found alternative suppliers for the goods it had previously sourced from the US. Oil and food—two of the top US exports to China—were readily supplied by Russia and other countries. Meanwhile, the US struggled to replace Chinese imports, forcing US businesses and consumers to bear the brunt of Trump’s tariffs.

These consequences have not gone unnoticed. Under both Trump and former President Joe Biden, the US has taken steps to incentivise domestic production and encourage firms to reduce their dependence on Chinese supply chains. But the extent to which such efforts will enable the US to shift more of the tariff burden onto China remains unclear.

To be sure, the vast size of the US market gives it a significant advantage. While Chinese importers can find alternative suppliers, Chinese exporters will have a hard time finding a market that can fully replace the US. The combined GDP of Russia, India, Africa and South America amounts to $13 trillion—just over one-third of US GDP, which is projected to rise to $30 trillion in 2025. And if the US convinces its Organisation for Economic Co-operation and Development allies to join the trade war, China could face tariffs from countries representing 46 percent of the global economy.

The Trump administration is betting that because the US is the world’s largest economy, China and other foreign exporters will struggle to find viable alternatives. This, in turn, would give the US decisive leverage in the trade war between the two countries. Early signs suggest that Trump’s strategy may deliver at least symbolic victories, with Mexico and Canada seemingly acquiescing to his demands by promising to do what they were already doing.

That said, tariffs are often a double-edged sword. On one hand, winning the trade war with China would allow the US to negotiate better trade terms. But US households could pay a heavy price. Fewer goods would be produced and sold to US consumers. While reduced imports could boost the competitiveness of domestic manufacturers, higher production costs and the absence of foreign alternatives would likely drive up consumer prices.

The potential geopolitical benefits of Trump’s trade war are less ambiguous, as his administration has decided to use economic pressure to achieve broader strategic objectives. It seeks to pressure Mexico and Central American countries to stem the flow of migrants to the US southern border and accept deported immigrants, and to counter China’s growing influence in the Asia-Pacific region and rein in Chinese expansionism, especially in the South China Sea. Moreover, Trump has vowed to take back the Panama Canal, and he seems serious about buying Greenland for its strategic location and natural resources—a US ambition going back to 1868.

Consumers and manufacturers in the US, China and beyond must brace for price increases and escalating geopolitical tensions. If Democrats regain control of Congress in the 2026 midterm elections, in which one-third of the US Senate and the entire House of Representatives will be on the ballot, they could curb Trump’s ability to impose tariffs. This gives Trump two years to win his trade war with China and the rest of the world—or at least convince Americans it was worth the cost.

Neither Atlanticist nor isolationist: recognise Trump as an imperial nationalist

Like people in other regions, Europeans face the challenge of discerning what motives underlie US President Donald Trump’s verbal provocations. After all, what Trump really wants is often unclear, which makes it difficult to devise a strategically effective response.

Traditionally, Europeans have interpreted US foreign policy through a binary lens: either a US administration is Atlanticist, in which case all is well (for the most part); or it is isolationist, which spells trouble. But Trump fits neither category.

He is certainly no Atlanticist, because he is convinced that NATO offers insufficient benefits for what it costs the United States, and that Europeans are all free riders. But he is hardly the first US leader to make this criticism. US complaints about European free-riding date to at least to the early 1950s, when NATO was just taking shape. The difference between Trump and his predecessors is that he puts a much higher price tag on protection by the United States and views it as something that Europeans do not really deserve.

But nor is Trump an isolationist, though many commentators describe him in these terms. Trump does not think only in crude transactional terms. He believes that the US is owed all the perks of hegemony, but with none of the costs. Rather than an isolationist, he is an imperial nationalist, like many 19th-century US leaders. Even his preferred policy instruments for ushering in a golden age—tariffs and territorial expansion—recall that era.

For Europeans, both seem absurd today. But from a US point of view, they have a historical resonance. The US’s war for independence began with a conflict over tariffs, which have since been seen as an instrument of sovereignty. The US is one of the few countries in the world whose constitution explicitly mentions trade. Even if tariffs tend to harm domestic consumers, they serve a political function.

This is reflected in Trump’s proposal to create a new External Revenue Service which would centralise tariff administration and serve as a depository for tariff revenues. With such an agency, Trump would have the means to redistribute revenues among states and political clients as he wished. He pursued a similar strategy during his first term when he established a fund within the Department of Agriculture to compensate those harmed by China’s retaliatory measures against US soybean exporters.

But the most important objective, of course, is to use tariffs to exert pressure on partners that are particularly dependent on the US market: Mexico, Canada and Europe. In the case of Canada and Greenland (an autonomous Danish territory), Trump has also expressed territorial ambitions, wishing to ‘get Greenland’ and make Canada the ‘51st state.’ Commercial pressure is thus a means of achieving territorial expansion, just as it was for the US in the 19th century.

In pining for a US geostrategic fortress stretching from Greenland to Mexico, Trump is unwittingly echoing a US State Department document from the middle of the 19th century which stated that the acquisition of Greenland would ‘flank British North America for thousands of miles on the north and west, and greatly increase her inducements, peacefully and cheerfully, to become a part of the American Union.’

Europe has understandably been left in a state of shock by Trump’s decidedly non-Atlanticist, non-isolationist geopolitical project. What can be done? Should we simply pray that it will not happen? That, more or less, has been the response from the European Union’s new high representative for foreign affairs and security policy, Kaja Kallas. In one of her first public statements, she said little about the threat from the US, because she is primarily concerned with just one issue: maintaining transatlantic solidarity to confront Russia in Ukraine. But laudable though this objective may be, it takes two to tango.

Meanwhile, no European official has bothered to mention the EU’s Anti-Coercion Instrument, which permits retaliatory tariffs to be imposed against any state that would use trade restrictions for geopolitical purposes. If Trump decides to intensify his pressure on Denmark through high tariffs, the EU will have no choice but to trigger this mechanism. To do otherwise would be to confirm—and exacerbate—its own geopolitical weakness.

For the same reason, the Danish government is wrong to play the appeasement card. Obviously, the balance of power is not in its favour. But by making no secret of its fear, it is inviting Trump to be even more aggressive.

While it does not make sense for Europe to deploy troops to Greenland—which would either look ridiculous or create the possibility of a war with the US—nor does it make sense to grovel. Whatever happens, Russia is the biggest winner for now. While Europeans hem and haw, no one should be surprised if the White House and the Kremlin negotiate the future of Ukraine behind closed doors.

Tag Archive for: Trade

Stop the World: It’s all about economic security with the EU’s Maria Martin-Prat

This week on Stop the World, we were pleased to host EU Deputy Director-General for Trade and Economic Security, Maria Martin-Prat. Interviewed by ASPI’s David Wroe, they discuss how the EU is managing economic security, Australia and Lithuania’s experience of economic coercion by China and, of course, the latest developments in tariffs. 

This episode was recorded on 11 February, 2025.

Guests:
David Wroe

Maria Martin-Prat