In early March US President Donald Trump let loose his previously threatened tariffs on imports from three key trading partners: China, Mexico and, most surprisingly, previously close US ally Canada. Then, within days, Trump was negotiating a deal to wind back his own tariffs. In mid-March of 2025, the situation remained uncertain.
Tellingly, Trump justified the new Canadian tariffs as incentive for his northern neighbour to end Canadian trafficking in the potent opioid drug Fentanyl. Yet as economic historian Phillip Magness points out, the claim lacks motive as well as evidence: the drug attracts far higher prices in Canada than in the US. Trump’s justification seems ridiculous.
So, this weird Canadian tariff should teach Australian business at least three lessons. First, the Trump administration is willing to use tariffs, or at least threaten to use them, widely over the next four years. Second, it will use them without an obvious powerful rationale. Third, it will willingly target traditional allies.
Most people who study tariffs – even those who can see some benefits for the US in using them – come to dislike most of their effects. Many reckon rising tariffs deepened the 1930s Depression. “Putting up tariffs is like putting rocks in your own harbour,” say Professor Tim Harcourt, a University of Technology Sydney trade expert. Magness, looking at the recent market gyrations, calls the constant tariff policy changes “a recipe for havoc on Wall Street and in international supply chains”.
The Trade Policy Uncertainty (TPU) Index for the US economy, below, shows soaring US economic uncertainty in early 2025. As its US Federal Reserve creators note: “News and increased uncertainty about higher future tariffs reduce investment and activity.”
The tariff threat
But Trump has long favoured tariffs as an economic weapon. In his first term, he imposed tariffs on steel and aluminium, though the Turnbull government negotiated an exemption for Australian products. Trump’s new tariffs are more extensive. Prominent US trade economist Doug Irwin says they “are likely to put the average [US] tariff back to where it had been in the 1940s”. Trump is reportedly looking at tariffs both on OECD nations levying digital services taxes, and on non-US firms manufacturing items including pharmaceuticals. Australia fits both categories.
Even if Australia avoids being directly targeted by US tariffs, global trade conditions seem set to grow far more difficult.
Possible harms to Australian small business
Tariffs trigger complex and hard-to-predict effects. But Harcourt and other trade experts suggests their possible effects on Australian business break down roughly like this:
- Higher US tariffs will raise prices for Australian exporters to the US, forcing them to slash margins, concentrate on specialty products, or seek new markets in Australia and elsewhere. Australia’s direct exports to the US are low, but they could be heavily disrupted.
- The single biggest effect of one nation’s new tariffs is often to spark more tariffs elsewhere, creating a spiral of trade distortion and disruption. Canada and China have already retaliated against the Trump tariffs with their own new tariffs. We don’t know how high this spiral will rise; Trump often argues his tariffs merely restore equality.
- The US’s tariffs may prompt foreign firms to divert goods to the rest of the world, lowering prices there. This search for new markets may even add to the pressures on Australian firms that don’t export at all.
- The biggest victim of a tariff war will probably be Australia’s largest trading partner, China, which relies disproportionately on international trade for economic prosperity. China bought 32.5 per cent of Australia’s total exports in 2023, making it our top overseas market for agriculture, resources and services. A heavily tariffed China will likely need somewhat less of these exports – bad news for Australian small businesses in these fields.
- Meanwhile, Australia’s status as a major supplier to China’s steel and aluminium industries will likely keep attracting US attention. Trump trade adviser Peter Navarro claims Australia has “dumped” subsidised aluminium into the global market.
One final unknown is the Trump administration’s stated desire to keep expanding the US tariff net. For instance, Trump has said he plans to impose tariffs on nations that impose non-tariff barriers such as value-added taxes, like Australia’s GST.
“Putting up tariffs is like putting rocks in your own harbour.”
Tim Harcourt, Industry Professor and Chief Economist at the Institute for Public Policy and Governance at the University of Technology Sydney
How tariffs could help some Australian small business
On a brighter note, it’s not clear tariffs will have the same effect they had in the 1930s. At least one recent study has argued that nowadays “the world economy can adjust to US trade wars, diverting trade around the US”. As Harcourt and others point out:
- Continuing tariffs on Canada and Mexico will push up prices of their commodity exports to the US, such as beef. That will make competing Australian exports to the US more attractive.
- Australian businesses with US arms may gain; for instance, says Harcourt, BlueScope US operations would benefit from US steel tariffs.
- Neither major Australian major political party yet backs higher tariffs here. If we avoid tariff escalation, a flow of relatively low-priced foreign goods could help some importers, investors and consumers.
- Nations that raise tariff walls generally see their currency appreciate, counteracting some of the price benefits for local producers that the tariffs aimed to deliver. A falling AUD/USD rate would hurt importers but help exporters.
Unknown disruption
The mercurial Trump might decide tomorrow that the spooked financial markets are telling him to move his focus to some other policy arena. We simply can’t know until it happens.
But whether or not big tariffs become a permanent economic feature, right now tariff talk is already adding uncertainty to businesses’ current picture of their mid-2020s prospects.
* David Walker runs report-editing consultancy Shorewalker DMS. He edited CEDA’s “Competing from Australia” report on trade and competitiveness.
The IPA and the Canberra Business Chamber will hold the 2025 Pre-Federal Election Insights online event on 26 March 2025, from 7:30am to 8:30am. Key Government, Opposition, and Independent leaders will go head-to-head on the policies shaping small businesses, industries, and individuals. More details on registration here.
