Trump’s Trade War: Implications for Investors and Australia

Donald Trump’s latest push for tariffs on Canada, Mexico, and China marks a significant escalation in his trade policies, with potential global consequences. While the delay in tariffs on Canada and Mexico suggests negotiations may prevent their full implementation, market volatility remains a key concern.

If enacted, these tariffs would be far larger than those in 2018, impacting 42% of U.S. imports and pushing average tariffs to their highest level since 1946. Trump has also hinted at further increases, including a general tariff of 10–20% on all goods and a staggering 50–60% on Chinese imports. Such aggressive measures risk significant economic disruptions, including a possible U.S. recession and retaliatory actions from affected countries.

Will These Tariffs Hold?

Trump has a history of using tariffs as a bargaining tool, as seen in previous negotiations with Colombia and Mexico. However, his administration has also positioned tariffs as a means to reduce America’s trade deficit, bring production back to the U.S., and generate tax revenue. If this strategy is truly about economic protectionism rather than negotiation, tariffs may remain in place for an extended period.

Despite these risks, some believe that a sharp stock market decline—similar to the 2018 market drop triggered by trade tensions—could pressure Trump to scale back his approach. If the economic pain becomes severe enough, public and political backlash may force a reconsideration of his policies.

Impact on the Global Economy

If fully implemented, these tariffs could cut U.S. GDP by 0.4–0.9% this year, likely pushing Canada and Mexico into recession. China’s GDP could take a 0.5% hit, potentially prompting further policy stimulus. The U.S. Federal Reserve may hesitate to cut interest rates if inflation rises due to higher import costs, while other countries could respond with rate cuts to counter weaker growth.

What This Means for Australia

Australia’s direct exposure to U.S. tariffs is minimal, as only 4% of its exports go to the U.S. However, indirect effects could be significant if a global trade slowdown weakens demand for Australian raw materials, particularly from China. While some estimates suggest Australia’s GDP could fall by 1.2% in a worst-case scenario, others predict a milder impact due to the resilience of the resources sector and the potential for currency depreciation to offset trade losses.

From a monetary policy perspective, these tariffs could strengthen the case for an interest rate cut by the Reserve Bank of Australia (RBA), as the primary risk is slower economic growth rather than inflation. However, the RBA may adopt a cautious approach to avoid further weakening the Australian dollar.

Investment Market Implications

Trump’s tariffs create a complex outlook for investors:

  • Negative for shares, particularly outside the U.S.
  • Better for U.S. small companies than large multinational firms.
  • Ambiguous for bonds, as weaker growth could lower yields, but inflationary risks may offset this.
  • Stronger U.S. dollar, which could hurt other currencies, including the Australian dollar.
  • Potential boost for gold, as investors seek safe-haven assets.

While these trade tensions add uncertainty, and add to market volatility in 2025,  long-term investors are encouraged to stay focused on their investment strategy rather than reacting to short-term market noise. Market corrections may occur, but a strong economic rebound remains possible, especially if talk around tariffs are eventually scaled back as occurred in his first term of office.

Times like these can be stressful, for superannuation members and most investors, the best approach is to turn down the noise around economies and investing (and particularly Donald Trump!) and stick to an appropriate long term investment strategy to take advantage of the rising long-term trend in share markets given the difficulty in trying to time short-term swings