What Trump’s return means for Australia’s economy
Economic effects on Australia
Two articles in the Saturday Paper deal with the effects of a Trump administration on the Australian economy: This is not good by Mike Seccombe, and Australia must reject Trump’s chaotic vision by John Hewson. They cover much the same ground as each other, and as has been reported in other media.
For these two observers, Trump’s policies on climate change, including his promise to once again pull out of the Paris Agreement, are probably the most important, although the consequences are not clear. They could energize anti-renewable lobbies around the world, setting back the modest achievements already made. They could lead countries to the short-term thinking that if the US is wrecking the planet, there is no point in anyone else caring. Or they could lead to a quite different outcome for national economies, as the EU and China push ahead redoubling their efforts, possibly applying border price adjustments and trade and investment restrictions on countries falling behind.
Writing in The Conversation, Wesley Morgan and Ben Newell put forward ten reasons why US president-elect Donald Trump can’t derail global climate action. The overriding reason is that the transition to renewable energy has an unstoppable economic and technological momentum. Also writing in The ConversationChristian Downie of ANU says that A Donald Trump presidency is bad for climate action, but Australia should get on with the job.
Almost every economist is concerned with the effects of Trump’s tariff proposals. During his last administration, when he raised tariffs generally, Australia was able to negotiate a carve-out, but Seccombe doubts if that could be achieved again. The larger issue with tariffs is Trump’s proposal to impose duties of up to 60 percent on Chinese imports. That would flow through to lower demand from China for our mineral products. Susan Stone of the University of South Australia writes in The Conversation about the likely effects of Trump’s protectionist proposals: Trump’s economic vision is no longer a “maybe”. Here’s what it might mean for Australia and the world.
These are the effects we can envisage because they fit within our established economic models. It’s much harder to predict the disruptions a Trump administration may inflict on the world economic order. Tariffs and deportations will set off inflation, which will see a rise in interest rates by the Federal Reserve, which could cause a steep rise in the US dollar and higher interest rates worldwide. Or his tax cuts could result in the world becoming tired of funding US budget deficits, setting off a run on the US dollar. If, as threatened, he takes over monetary policy from the Fed, there could be a worldwide financial shock as Henry Maher of the University of Sydney writes in The Conversation: Trump has threatened to fire the chair of the US Federal Reserve. That could be bad news for inflation.
On Monday Treasurer Jim Chalmers laid out the likely effects on the Australian economy. Analysis by Treasury generally confirms the views expressed by the sources quoted above. Notably he pointed out that the trend to protectionism is not limited to Trump’s America.
He pointed out that the government, using tight fiscal policy, has been successfully combatting the inflation it inherited. More importantly he assured us that Australia would not respond to any global retreat to isolationism by de-coupling from the world economy. Our response would be “de-risking” rather than “de-coupling” to use his words. De-risking involves diversifying the economy, boosting productivity, dealing with the challenges of climate change, and making the best use of our natural and human resources.
The Future Made in Australia program and a $900 million grant to the states to boost productivity and competitiveness, announced in another speech two days later, are part of that de-risking strategy. Roy Green, of Sydney’s University of Technology explains in a Conversation contribution what is involved in these processes of boosting Australia’s economic resilience.
Included in Treasury’s analysis is the probability that inflation in the USA would flow through to Australia. Many commentators have asserted, with a degree of unwarranted confidence, that this means interest rate cuts in Australia are now out of the question. But Trump does not take office until late January, the price impacts of tariffs take time, and a global trade war would take even longer to develop. In fact, if a trade war does develop, triggering a global economic slowdown, the correct response could even be an expansionary monetary policy when the time comes. Similarly a sharp reduction in exports to China could require an expansionary monetary policy. For now the Reserve Bank should surely act on the data before it, which indicates “that inflation is moving sustainably towards the target range [of two to three percent]” to quote the RBA’s condition for expansionary monetary policy.
The only certainty about Trump’s re-election is a rise in uncertainty. That is uncertainty, as distinct from risk, which can be built into firms’ and governments’ calculated cost of capital. Uncertainty results in companies and governments deferring plans, and cutting back on new ventures. It is bad all around.