Let’s get back to basics
With share markets all over the place this week, I’ve been getting a lot of questions about the Trump tariffs and what they mean.
I’ve talked about it a bit recently (like and subscribe if you’re new to the channel!) but let’s start at the ground floor and work our way up.
In this piece I’m going to look at the following:
- What are Tariffs?
- What’s the Economic logic?
- What are the economic impacts – US, World, Aus?
- What’s the impact on the share market
- Impact on Australia’s property market?
- Where does it go from here?
Easy right? Here goes.
What are Tariffs?
Tariffs are a tax paid by a company that imports something from somewhere. So if I’m an American reseller, and I pay $10 for a widget from China, and there’s a tariff of 10%, I pay $1 to the American government.
The key thing to clear up here is that the foreign country doesn’t pay the tariff. The Chinese government doesn’t pay it. What it means that the I now have to add an extra $1 to my sales price to recoup the tariff, which reduces the Chinese product’s competitiveness relative to domestic alternatives.
What’s the Economic logic?
There’s two things that I see going on here. The first is the text-book logic for tariffs. A lot of American manufacturing was “off-shored” to China and other places in the 90s and 2000s. As those industrial sectors closed down, it created a lot of job-loss and economic disadvantage. In what came to be called “Rust Belt” America, unemployment rose substantially, and with it deaths of despair – suicide and substance abuse.
Trump’s promise to these communities was that he was going to bring industry back home. This is part of the reason why he now owns the working class vote – a voting block that was typically Democrat.
Tariffs is part of the strategy for bringing industry back. Tariffs give domestic industries a pricing advantage, and encourages “American made.”
That’s the theory anyway.
The second factor here is that I think Trump recognises that America is home to the most valuable consumer market in the world. He’s decided to make it pay-to-play. Which is why we are facing tariffs here in Australia, even though we buy more from the US than we sell to them.
What are the economic impacts – US, World, Aus?
Team trump have said they are willing to bear the pain of this tariff-led readjustment. That pain will take the form of higher prices – as businesses past the cost of the tariffs on to their customers – and lower global growth – since lower trade should probably mean less specialisation, and less production. In the short run at least.
Australia’s exports to the US are relatively small, so that shouldn’t have a direct impact. But there are substantial tariffs on China, Korea, Japan, etc, so we could see reduced demand from our key export markets.
There’s no story here where this is a positive for economic growth anywhere in the short run.
What’s the impact on the share market
There’s two things going on here. The first is that people have been saying for a while that global markets, and particularly the American market, have been looking a bit bubbly. The recent run up as almost entirely been driven by the AI narrative, and that narrative had already started to look a bit leaky – e.g when China launched their own, much-cheaper, large language model.
So there was already a sense that the market was getting nervous. The Trump tariffs seem to have been the pin the market was waiting for, and so a fair bit of the action, in my mind, comes down to a fairly necessary correction.
That said, if inflation persists, and global growth slows, then that will have an impact on earnings, which should down-rate share prices on its own. So that’s in play as well. How all that comes out in the wash is anybody’s guess. If share prices fell another 20% on reduced earnings, that would be consistent with historical experience. But maybe they don’t fall at all either. That could happen too.
Impact on Australia’s property market?
With a reduced global growth outlook, markets have already gone from pricing 3 rate cuts this year to 4. Some economists are even saying we could get 50bips in May. That could happen.
If that does, property will get a rocket under it.
The only thing about that narrative is that it assumes inflation remains on its current trajectory. It is possible, if trade from China to the US freezes up entirely, that China will be looking to dump its good somewhere else. We could find ourselves inundated with cheap Chinese stuff, (and Vietnamese, and Korean, and Indonesian… etc.)
To the extent that that’s deflationary (cheaper prices), that might put the RBA in less of a rush to cut.
Where does it go from here?
This is seriously anybody’s guess. But one thing I’d note is that Trump is an expert in the negotiation technique of ‘anchoring.’
So if I tell you something normally costs $100, but you can have it for $10, you naturally think you’re getting a bargain, because I’ve anchored your expectations to $100.
Similarly, if Trump tells China they’re paying tariffs of 104%, and then it gets walked back to 30% through negotiations, China will feel like they’ve got a good deal, even though they’re now paying an extra 30%.
All to say, Trump’s opening claim is almost always an ambit one. It wouldn’t surprise me that if in six months the tariff story is only half as bad as it looks right now.
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JG.
Very informative information.