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Key points:
- President Trump’s April 2 tariff announcements exceeded market expectations, prompting significant reactions across global markets.
- A mild US recession would appear likely unless tariff policies are quickly reversed or offset by alternative policy easing. Both outcomes seem likely, with President Trump already announcing delays and temporary reductions for many tariffs, excluding most measures targeting China. Notably, some technology goods have recently received short-term exemptions. Any US recession, even mild, will negatively impact global and Australian economic growth.
- The Reserve Bank of Australia (RBA) will most likely cut interest rates in May.
Tariff announcements and uncertainty impacting markets, share prices and commodities
After a lot of waiting, the so-called Liberation Day tariff announcements were considerably larger than markets had expected, including very large tariffs imposed on Australia’s three largest export destinations (China an additional 34% tariff, Japan 24% and South Korea 25%). These tariffs added to other tariffs already in place, taking tariff rates on Chinese exports to the US to around 60%. Other South-East Asian nations were also hit hard.
Subsequent rounds of retaliation between the US and China have pushed bilateral tariff rates to punishing levels—145% on Chinese exports to the US and 125% on US exports to China. Such rates are likely unsustainable. Australia is a relatively small exporter to the US. Outside of steel and aluminium, other Australian exports attracted the lowest 10% tariff rate. The broader economic impact for Australia was always going to be indirect coming through reduced growth among key trading partners, and weakened business and consumer confidence.
A mild US recession now the base case, unless the tariffs are quickly reversed or other policy support provided
Yale University’s The Budget Lab provided an excellent analysis of the impact of the US tariffs announced up until April 2 excluding recent retaliatory measures from China and Europe and of course subsequent back tracking by the US. The analysis concluded that US GDP growth would be 0.9 percentage points lower than otherwise in 2025 (and permanently around 0.5% lower), and the price level 2.3% higher. The additional retaliatory tariffs are likely to trigger a mild US recession unless swiftly reversed or counterbalanced by further policy support.
It’s obviously a very fast-moving and constantly evolving situation. This makes it very difficult to analyse and predict. Are the tariffs a short-term negotiating tool aimed at bringing freer global trade, a positive outcome for a small open trading economy like Australia? Or will very high tariffs persist, causing negative consequences for global and Australian economic growth?
Recent developments provide hope for compromise: US Treasury Secretary Bessent will lead trade discussions with Japan; US Commerce Secretary Lutnick indicated tariffs may only remain in place for days or weeks; reciprocal tariffs were recently delayed 90 days and temporarily reduced to the 10% level for all countries except China; and various technology goods imported from China have also been given temporary exemptions.
What it means for my business…
After negotiations conclude, it appears likely that the US will implement a baseline 10% tariff on imports from many countries, with somewhat higher tariffs between the US and China and on select commodities. While this is not expected to trigger a global recession, it is likely to create ongoing uncertainty for businesses, consumers and markets over coming months. This uncertainty may lead to reduced spending and delays in hiring and investment decisions.
Encouragingly, the Australian government has signalled it will not impose reciprocal tariffs, protecting Australian consumers from immediate price increases to be faced by US consumers and businesses. Meanwhile, the weaker AUD can help offset competitiveness pressures, although it also raises costs for imported products and inputs. There may be some new sourcing opportunities from non-US suppliers affected by tariffs.
It’s also important to maintain a long-term perspective. Periods of market volatility can present valuable opportunities for cash-rich businesses or individuals looking to acquire listed or unlisted assets at more attractive valuations compared to recent months.
These developments reinforce the importance of market diversification for those that export, having appropriate financial buffers for unexpected developments or economic downturns, and of the constant need to examine the productivity of your business processes and workforce.
One upside is the likelihood that Australian interest rates may be reduced at the May RBA Board Meeting. The key question is expected to be the size of the reduction, with market consensus leaning towards a 25 basis point cut to the cash rate.
