Other economics

Trump’s tariffs – why the US and Australian landscapes are different

Ash trays in restaurants, typewriters, cheques, and rotary dial telephones are among things now unknown to most Australians.

To this list can be added tariffs.

Before the Hawke-Keating reforms of the 1980s Australia stood out for its high rate of protection against imports, not only through tariffs, but also through import licensing and import quotas. Tariffs and these other measures helped protect jobs in manufacturing industries, but they came at a high cost, because they sustained high prices for everyday goods, including clothing, electrical appliances and cars. They had worked well in their time but as manufacturing became more capital intensive, and as “developing” countries industrialized and were able to make stuff more cheaply, they came to be seen as a regressive consumption tax. Australia now has an average tariff of around two percent (and no one seems to be quite sure why we don’t get rid of that remnant).

With that history behind us, there is no political appetite in Australia for a return to protectionism. Covid-19 raised concerns about reliance on fragile supply chains, but no one has suggested we revert to blocking imports.

That history is covered in Matt Bevan’s episode of If You’re Listening: Trump’s tariffs – make America expensive again. (17 minutes) Using colour television sets – once subject to an import duty of 180 percent – as an example, Bevan explains how Australians were weaned off tariffs, and why, by contrast, they seem to be attractive to American voters.

The Unites States had its era of protectionism, including the disastrous 1930 Smoot-Hawley Tariff that exacerbated the damage of the 1930s Depression, but in the postwar years America reduced tariffs, quickly. In any event it was as a larger and more self-sufficient economy than Australia, which meant that to the public there was not an obvious connection between tariffs and important industries such as automobiles. That is not to say the US is an open economy: with an elaborate set of non-tariff barriers, including defence-related import restrictions, non-uniformity of state regulations, and a medieval system of weights and measures, the US is a wretchedly difficult country for any aspiring exporter. But in recent times tariffs have not been part of the mix.

Also, unlike the situation in Australia, Americans have an obsession with bilateral trade balances. We have a trade deficit with the EU and the US, and a surplus with China and Japan, but apart from times when trade balances are matters of bargaining chip in trade negotiations, Australian policymakers have little concern with bilateral trade balances. But for reasons to do with its chronic deficit on current account, and a certain mercantilist tradition, bilateral imbalances are of major concern to US policymakers, Democrat and Republican. That context of Trump’s moves is covered well in Saul Eslake’s short set of slides The economic consequences of Mr Trump.

Bevan explains how Trump portrays tariffs as a “tax on foreigners”, a framing with political appeal. Tariffs are indeed a tax against foreigners, but the higher prices paid for goods subject to tariff protection are paid by all consumers – not only those who still buy the imported products, but also, effectively, by those who pay the higher prices for domestic products produced by the tariff wall.

Australia, almost by accident, has been considering the economics of industry protection since 1921, when the Tariff Board was established. Over time, through several changes in name and mission, but always with retention of its economic expertise, it became the Productivity Commission. Its most significant metamorphosis was in 1973, when the Whitlam government instructed it to report on not only the benefits to industry of protection, but also the costs to consumers. There is no equivalent body in the US that keeps reminding policymakers of the cost of protection.  

Trump’s “tax on foreigners” line aligns with his overall fiscal policy, which is to cut taxes and spending – in a country already running a large fiscal deficit – and to suggest that tariffs will fill the gap. There is a fundamental fallacy in his thinking because the public revenue collected by tariffs is only incidental: if they really work to keep out imports, they collect very little revenue.

The other problem is that even if tariff protection does bring manufacturing industry back to America, the jobs it protects won’t be the plentiful well-paid jobs of America’s manufacturing heyday. Manufacturing is capital-intensive: the only unskilled employees in an automobile factory are those who drive the cars off the assembly line.

Peter Martin and two guests – Taj Pabari and Emilia Terzon – in a session of The economy stupid discuss the basic economics of tariffs, the complication of applying tariffs to goods which have no one clear country of origin, and the way tariffs on basic materials, such as steel and aluminium, impose costs on other industries down the line.

There is no doubt that tariffs will hurt American consumers, but as Shannon O’Neil and Julia Huesa of the Council on Foreign Relations point out, Trump’s tariffs could do more damage to trade-exposed economies like Canada and Mexico (and by implication Australia) than they do to the US, which is more self-sufficient: What Trump’s trade war would mean, in nine charts.

It’s hard to make sense of Trump’s tariffs through an economics perspective. Maybe they need to be seen through the perspective of one who sees all transactions in win-lose terms. That goes right against 200 years of economic theory and thousands of years of human experience in benefiting from trade. But Trump’s business background is in real estate, where one-off win-lose transactions dominate. And they might simply be his version of demonstrating his power.

What Trump’s tariffs mean for Australia

Even though we’re one of the few countries with which the US has a trade surplus, we’re not going to get a carve-out, David Speers explains: Donald Trump's treasury secretary made three things very clear to Jim Chalmers and Kevin Rudd in Washington. Speers explains those three things: “Donald Trump is determined to impose tariffs, there's no guarantee of an exemption for Australia, and linked to the trade threat is a requirement for allies to lift their defence spending.”

There is the ridiculous claim from Trump that our GST acts as a tariff. It is nothing of the sort, because it is not directed against imports: it applies to all goods and services for final consumption, domestically produced and imported.

Although a few Americans may cut back on their enjoyment of Yellowtail chardonnay, the ABC’s David Taylor doesn’t see much direct effect on Australia. The main effects on Australia in the short-term will result from America’s tariffs on China. But we are reasonably adept at finding new markets when we face setbacks in established markets.

So far there are no serious voices suggesting Australia should impose retaliatory tariffs on the US. Treasurer Chalmers has not explicitly ruled out retaliation – he’d be silly to rule anything out in the present situation – but Australian policymakers are reasonably convinced that retaliatory tariffs aren’t in our economic interests. In any event there isn’t much we buy from the US that competes with our local production.

The greatest problems for Australia are ones that the whole world shares. Ian Verrender fears that Trump’s trade war could trigger a financial meltdown. The stock market, particularly in the US, looks like a bubble ready to burst, and as Verrender notes Warren Buffet, one of the world’s few cool-headed billionaires, now holds 27 percent of his portfolio in cash. That’s about the immediate impact on financial markets, but Trump’s tariffs could set off an all-out global trade war.

It’s all very unstable: in The Conversation Garritt C Van Dyk of the University of Waikato writes that Trump is reviving a tariff strategy from America’s ‘Gilded Age’. It didn’t end well last time.

National accounts – subdued celebrations in Labor ranks

Wonderful news. Australians have enjoyed a real income rise of $68 a year, revealed in the National Accounts for the December Quarter released on Wednesday.

The actual good news is that Angus Taylor has to stop saying that GDP per capita has been falling for the last 7 quarters, covering most of the period Labor has been in office. This is shown in the red line in the graph below. Note that little uptick on the end of the line.

Probably a graph

That line of GDP per capita runs through four periods:

Real GDP per capita is now about 3 percent higher than it was in December 2019, just before the pandemic. Three percent over six years, or 0.5 percent a year.

That’s probably about the current speed limit of our economy, in view of the long-term fall in labour productivity (the blue line), mainly on the Coalition’s watch. GDP per hour worked is now back to where it was before the pandemic – there has been no net gain over the last six years. In fact it appears from the graph that productivity has been falling, but that’s probably because the number of hours worked has risen in a strong labour market. As the labour market strengthens the least productive workers take up employment.

The national accounts productivity series is a first-order estimate of labour productivity. Quite separately last week the Productivity Commission produced its 2025 bulletin on multifactor productivity – an indicator of how well labour and capital inputs come together to produce outputs. The Commission’s research finds significant efficiency gaps in some industries – areas where more output could be achieved through a better utilization of existing labour and capital resources. Estimates of multifactor productivity at the industry level are difficult to interpret, and they can throw up spurious numbers, but this study finds a significant efficiency gap in “utilities and construction”, which aligns with other findings of inefficiency in our construction sector.

A series often left out of press reports on national accounts is the share of wages and profits in national income. That’s shown in the graph below. The last two years have seen a small growth in the wage share. This is in keeping with government policy, which has been deliberately to reverse the Coalition’s policy of suppressing wages.

The ABC’s Gareth Hutchens summarises the main points in the GDP figures in his post: Australia's economy ends 21-month per capita recession as GDP grows faster than population. It’s full of good economic vibes, which you can pick up from the accompanying picture of Treasurer Chalmers.

In a post earlier in the week Hutchens, noting the recent good news on inflation, observed that in spite of the good economic news the Albanese government isn’t boasting. Maybe Chalmers’ reticence (other than the occasional smile for a photographer) is based on modesty, because he realizes, as few politicians do, that the hard work in economic adjustment is done by the people. The government only assembles and publishes the figures.

Probably a graph

 

The gender pay gap is closing, but slowly

Gender pay gaps are closing. It won’t be long before we can follow Trump’s lead and dispense with DEI – mission accomplished.

At our present rate we should reach that happy point by 2070! [1]

The Workplace Gender Equality Agency has published the Employer gender pay gaps report, revealing that just over half of employers reduced their gender pay gaps in 2023-24.

The gender pay gap should not be confused with the principle of equal pay for equal work, which has been a legal requirement since 1969. Rather it’s about the difference between men’s and women’s pay in 7800 employers with more than 100 staff. As such it reveals a great deal about the employment structure of different industries, and of firms within these industries.

In most enterprises men are paid more than women: this can be because opportunities and reward systems within enterprises favour men, and because some well-paid occupations are dominated by men. The former pay gaps can be addressed within corporations, while attending to the latter also involves community norms and expectations, and education institutions.

The report is data-rich but light on analysis. That is left to others, presumably because it doesn’t want to point out that the Commonwealth Bank has a larger gender pay gap than the National Bank, for instance. The report provides enough pay information to keep researchers going for months.

The ABC’s Daniel Ziffer has pulled together a summary and some observations. He finds, for example, that the ABC had a gender pay gap of 5.3 percent favourable to men.

While some employers aren’t enthusiastic about providing data to the WGEA, many have enthusiastically embraced the idea of lowering gender pay disparities.

It’s easy to ridicule DEI policies by drawing attention to some of the most striking outcomes, and to misrepresent DEI as some woke agenda. That has indeed happened in some situations, where DEI is used as a cover for pushing ideas such as critical race theory, and for censoring people for their use of specific words.

But if taken seriously it is about the most unwoke aim of improving productivity by making best use of people’s capabilities. It can act as a discipline to ensure that people really do recruit on the basis of merit. Harvard Business School has a challenging piece What drives managers to sabotage talented employees? It does indeed happen, perhaps unconsciously. (Think of the time you were on an interview panel and found a candidate who was clearly cleverer than you.) DEI policies, if used properly, can protect against wasting talent.

Writing in The Conversation three academics from RMIT University explain the practicalities of DEI policies, particularly in respect to the opportunities they provide for women: Diversity, equity and inclusion in the workplace are under attack. Here’s why they matter more than ever.

There are media reports that Dutton, if elected, would cut back on DEI requirements, at least in the Commonwealth public service – which has been very successful in closing the gender pay gap.

1. A bit of rough arithmetic. In 2022-23 the median gap was 9.1 percent, in 2022-23 it had fallen to 8.9 percent. That is 0.2 percent in one year. At that rate the gap will be closed in 45 years (8.9/0.2). ↩

Peter Dutton’s investments – chasing the wrong issues

Did Peter Dutton have inside knowledge when he bought and sold shares in Australia’s banks in January 2009, at the same time as the Rudd government was developing a major bank bail-out in the wake of the Global Financial Crisis?

The story has been pursued by Samantha Maiden on news.com, first on February 25 – Peter Dutton’s ‘highly unusual’ GFC share-trading in Labor’s sights – and then on March 4, with more details of share prices and timing – Peter Dutton announced share sale on day Kevin Rudd warned of a ‘national economic emergency’.

In an extensive interview on the ABC’s 730 Labor MP for Parramatta Andrew Charlton, who was an economic adviser to Prime Minister Rudd during the GFC, lays out the reasons he believes Dutton has “questions to answer” about his share trading, to use the journalists’ cliché.

This is in the wider context of revelations about Dutton’s financial wealth. James Massola of the Sydney Morning Herald drew attention to his having bought 26 properties, transacted through family trusts, family companies and personal superannuation schemes. It’s not a good look for Dutton who “has long been a critic of changes to family trusts, negative gearing or capital gains tax rules that can favour property investors”.

Massola does not suggest Dutton has done anything illegal in acquiring his financial fortune, but that’s the very point made by Rod Campbell of Deakin University in The Conversation: Politics and property – how our leaders are among the privileged using legal loopholes to build their wealth. “Dutton’s story highlights a tension that continues to frustrate voters: politicians who enjoy superior wealth are the ones who decide the financial circumstances of their constituents’ lives”, he writes. The mechanisms available to those who grow their financial wealth through idle investment and speculation are not available to those who work for a living and actually contribute something to the community.

Unfortunately the political argument around Dutton’s financial wealth is mainly about timing of his purchases and disclosures on the Parliamentary register of assets, rather than the broader issue of politicians’ use of tax breaks. Labor politicians who hold “investment” properties would find such exposure would reveal a fair bit of hypocrisy among those who piously assert that housing should not be a financialized commodity.

Opposition politicians have been quick to criticize Labor for waiting 16 years to bring up the issue of Dutton’s share trades: in view of the personal attacks Dutton and his colleagues have mounted against Albanese that’s a bit hypocritical.

This move by Labor looks like a classic negotiation tactic. If the other side plays dirty, let it be known that you are able to play dirty in response. You play the game – the political game in this case – quietly, without savagery, not because you’re weak, but because you have the strength and discipline to avoid playing dirty.

On the question of insider trading, anyone who works in economic agencies in the public service, or around Parliament House, cannot help coming across knowledge that could be used to personal financial advantage. The more prudent employees protect themselves by distancing themselves from specific investments, for example by using set-and-forget vehicles such as index funds.

(In the interest of full disclosure I should reveal that I sold shares in all four big banks in April 2009 – shares I had held for many years. It was indeed a generous bail-out: the profit I made on those sales, like the profit Dutton made, was entirely unearned and undeserved.)